Tony Wickenden: Has UK jumped the gun on diverted profits tax?

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I ended last week’s article on corporate tax avoidance with the fact Caffé Nero has recently brought attention to itself (in a good way, it had hoped) in deciding to stop stocking milk from farms in areas that culled badgers. It seems, however, that badger-loving Caffé Nero is also a fan of Luxembourg and the Isle of Man, and has paid no tax in the UK since 2008.

I left you with the question: does the public care? To answer that question you need to take account of the fact it seems coffee and where you buy it represents an increasingly important part of peoples’ lives. With this in mind, the shops people hang out in need to be seen as good citizens. It is not cool to fraternise with (perceived/alleged) tax avoiders.

So, there is the stick of being branded a tax avoider but also the carrot of the Fair Tax Mark. I have written about it before. Effectively, it is a kite mark for good taxpaying, transparent corporate businesses. A company can qualify for it by hitting a number of specified benchmarks, as well as paying a fee. Being a kite-marked responsible corporate citizen could well generate extra customer loyalty.

There is also a newer version in the recently launched Fair Tax Pledge. This is a free, self-certified declaration of opposition to tax avoidance. This public statement of good corporate tax citizenship is something that appeals to the coffee stalls you find on stations, run by AMT. Apparently they have signs at the counter stating “100% taxes paid”. Would that motivate you to buy from them as opposed to Nero or Starbucks? Or is personal taste the key determinant?

Perhaps it is more important to look at what is going on officially. There is currently some consternation that the UK has jumped the gun on the rest of the OECD with the introduction of the diverted profits tax.

Some, especially US politicians, say the UK is undermining efforts on a broader scale (notably through the OECD) to tackle so-called Base Erosion and Profit Shifting: action to prevent companies shifting the taxability of profits in one jurisdiction to another through an international global corporate business structure.

Apparently, a number of US-listed companies have already told investors that the UK DPT could have a material impact on their finances. The DPT is expected to raise more than £1bn over the next five years by applying a penal 25 per cent rate to diverted profits.

So how does it work? The tax targets specific, defined circumstances where it is considered taxable profits have been diverted from the UK. The legislation is a response to the perception that large companies are generating significant profits from the country but paying very little UK tax.

The DPT is intended to target those multinationals that undertake contrived planning to avoid or reduce tax on profits generated in, or connected to, the UK. It was introduced to deter and counteract such activities.

The 25 per cent DPT is intended to encourage businesses to restructure their arrangements so that they are subject to the lower 20 per cent rate of corporation tax instead.

The DPT applies to diverted profits arising on or after 1 April this year. There are apportionment rules for accounting periods that straddle that date. I will give a bit more detail on the DPT next week.

Tony Wickenden is joint managing director at Technical Connection