Calculating taxable diverted profits ― avoided PE cases

By Tolley in association with Paul Bowes
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The following Corporation Tax guidance note by Tolley in association with Paul Bowes provides comprehensive and up to date tax information covering:

  • Calculating taxable diverted profits ― avoided PE cases
  • Step one
  • Step two
  • Estimating taxable diverted profits for charging notices

The references in this note to HMRC guidance have been updated to reflect HMRC’s guidance  published in December 2018. This version supersedes the interim guidance published in March 2015 and updated in November 2015.

Step one

Once it has been established that a charge to diverted profits tax (DPT) has arisen in accordance with the conditions of FA 2015, s 86, as set out in the DPT ― avoidance of UK permanent establishment guidance note, it is then necessary to calculate the quantum of the non-UK company’s profits (if any) that will be subject to the charge. The aforementioned guidance note should be read prior to reading this one.

FA 2015, s 88

There are three statutory ways in which the amount of taxable diverted profits may be determined, under FA 2015, ss 89, 90 and 91 (although there are technically four if sections 91(4) and 91(5) are considered separately), which are set out in Step two below. In order to determine which of these methods apply, it is necessary to determine whether or not the ‘mismatch condition’ (defined in the DPT ― avoidance of UK permanent establishment guidance note) applies and, if so, whether or not the ‘actual provision condition’ (defined below) then applies at the same time. This latter concept plays an important part in the calculation of taxable diverted profits involving ‘mismatch condition’ arrangements under FA 2015, ss 90 and 91. FA 2015, s 89 deals with avoided PE situations not involving ‘tax mismatch condition’ arrangements, ie where the ‘tax avoidance condition’ solely applies.

The comments above reflect the flowchart shown in HMRC’s guidance notes to calculate diverted profits under FA 2015, ss 89–91. In ascertaining the circumstances where an avoided PE may exist under FA 2015, s 86, either the ‘mismatch condition’ or ‘tax avoidance condition’, or both conditions must apply for a charge to DPT

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