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  • ARTICLE - UK, OECD

    (No) Appetite for Diversion: All Guns and No Roses for MNCs in UK

    21 Jun

    Introduction – Welcome to the bungle?

     

    They must have thick skin, those HMRC people.

     

    I sometimes wonder whether it’s provided when they join or if it accumulates over their time in post.

     

    After all, it takes either fortitude or tone deafness to keep going in the face of seemingly endless criticism.

     

    This year alone, among other things, HMRC has been accused of allowing customer service to plummet to an all-time low  and performed a rapid about-face over proposals to hang up its helpline during the summer months.

     

    Yet there are times when persistence appears to pay off.

     

    Developing a culture of aversion to diversion?

     

    Take the Diverted Profits Tax (DPT), for instance, which (whisper it!) looks as though it may be changing the kind of corporate shenanigans on the part of big multi-national businesses which in the past has enabled them to minimise the amounts which they make to the Revenue.

     

    The tax came into effect in 2015. Whilst not applying to small and medium-sized enterprises (SMEs), it is a means of countering the exploitation of overseas offices (or ‘permanent establishments’, as they’re otherwise known) to artificially reduce their UK profits and tax liabilities.

     

    For organisations with the kind of turnover and structures which make it possible, such paper shuffling can be incredibly lucrative.

     

    There is a sting in the tail, though.

     

    Get caught and the sanctions – including a six per cent surcharge on top of the normal Corporation Tax rate – can be enormous. An even higher rate of 55 per cent exists in respect of specific profits in the oil industry.

     

    Paradise city?

     

    Figures released last month by HMRC show that DPT generated more than £8.5 between its introduction and March last year 

     

    The Revenue’s notable scalps include the likes of the drinks giant Diageo which agreed to hand over £190 million in 2018, a settlement which I discussed with The Times at the time .

     

    Realising that it was onto a winner, HMRC subsequently turned those thumbscrews even tighter, launching something called the Profit Diversion Compliance Facility (PDCF) the following year.

     

    It aimed to “encourage” companies identified by some of the near 400 Revenue staff working on international tax issues as having operations which might trigger a DPT liability to “review both the design and implementation” of their policies and pay any tax due.

     

    In short, it offers a chance to ‘fess up to any mischief and avoid being hauled over the coals and, given that it’s eked more than £732 million extra income for the Revenue, could be said to have demonstrated its worth.

     

    Para-gripe city?

     

    Cynics might suggest that the DPT performance record, in particular, indicates that its novelty is wearing off.

     

    The £108 million recovered in the last financial year was less than half the sum reclaimed only 12 months before.

     

    However, I take the opposite view.

     

    I think it is evidence that instead of using offices in far-flung corners of the globe to manipulate their balance sheets and mitigate their UK tax bills, multi-nationals accept that they now have nowhere to hide.

     

    Of course, that is not solely down to HMRC’s efforts.

     

    Sweet tithe of mine

     

    The  Organisation for Economic Co-operation and Development (OECD) has, since DPT was introduced, also unveiled the Global Minimum Tax (GMT) as part of its campaign to eradicate the use of profit shifting which led to the Diverted Profits Tax.

     

    This new measure means that multi-nationals turning over more than €750 million (£633.38 million) will be subject to a minimum 15 per cent tax rate wherever they operate in the world.

     

    It amounts to a combination, one-two punch for the UK tax authorities, in particular. The DPT can still address individual methods not covered by the GMT’s more broad brush approach.

     

    However, the extent to which the UK will retain DPT is perhaps up for debate as well.

     

    (A few months after) November Rain*

     

    To all that, we can add the Revenue’s intention, announced in January, to actually reform DPT, making it part of the wider Corporation Tax for the sake of simplicity – something which in itself is a novel and noble development in UK tax procedures.

     

    There are, I should point out, still some companies which appear reluctant to accept that the diverted profits game is up.

     

    The latest detailed HMRC missive describes how it “is currently carrying out about 90 reviews into multinationals with arrangements to divert profits”, inquiries which involve some £2.6 billion in potentially unpaid tax.

     

    Furthermore, the Revenue is involved in “various international tax risk disputes where the business was not prepared to change their arrangements”. Embroiled in those proceedings led by HMRC’s Fraud Investigation Service “are a number of large businesses” who face possible civil or criminal investigation.

     

    It may well be that corporate titans once inclined to accounting mischief have just been worn down by the Revenue’s dogged investigators.

     

    A change in personnel on the boards of these companies coupled with the prospect of a process lasting five years and a large penalty can also persuade even the hardiest souls to call a halt to such behaviour.

     

    Even those who remain resistant to the newly knighted Jim Harra and his colleagues can’t escape the potential reputational damage arising from the leak of sensitive documentation as has happened successively with the Pandora, Paradise and Panama Papers.

     

    Conclusion

     

    Now that HMRC is finally and effectively calling the tune, there is – with no little apologies to Axl Rose and his bandmates – less of an appetite for diversion.

     

    That is a situation for which and for once the Revenue deserves credit.

     

    Thanks for your patience.

    Final thoughts

    If you have any queries about this article on the UK’s diverted profit tax, or other UK tax matters, then please get in touch.

    *

    Look what you’ve reduced me to….

    Lorem ipsum dolor sit amet, consectetur adipiscing elit. Vivamus ut semper risus. Fusce ac pharetra sem. Praesent vitae eros a quam fermentum dignissim.

    MR BLAKEFIELD. REGAL CAPITAL. FLORIDA.

    Lorem ipsum dolor sit amet, consectetur adipiscing elit. Vivamus ut semper risus. Fusce ac pharetra sem. Praesent vitae eros a quam fermentum dignissim.

    MR BLAKEFIELD. REGAL CAPITAL. FLORIDA.

    Lorem ipsum dolor sit amet, consectetur adipiscing elit. Vivamus ut semper risus. Fusce ac pharetra sem. Praesent vitae eros a quam fermentum dignissim.

    MR BLAKEFIELD. REGAL CAPITAL. FLORIDA.

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