The government of the UK (United Kingdom) has enacted a measure – Diverted Profits Tax (‘DPT’) – in its Finance Act, 2015, to penalize the corporations who have diverted their profits elsewhere to dodge their tax payouts in UK.

1. Diverted Profits Tax (a) Google Tax: United Kingdom’s combat against tax evasion
Thangadurai VP,Advocate
MPC Legal,New Delhi
The open secrets of the tax world came out truly in open and the western public’s outrage on the
contrived tax structures of Starbucks, Google, Apple and countless other MNCs has been
unprecedented. The underlying fact that these structures are legally valid as per the provisions of law
fuelled the debates such as ‘legality vs morality’ and ‘double non-taxation’ among the tax fraternity.
The governments were forced to avoid these glaring loopholes in the tax laws to regain the public
confidence. The BEPS (Base Erosion & Profit Sharing) committee was also constituted by the OECD
(Organization for Economic Co-operation Development) to address this issue in particular, among
others.
Under these circumstances, the government of the UK (United Kingdom) has enacted a measure –
Diverted Profits Tax (‘DPT’) – in its Finance Act, 2015, to penalize the corporations who have diverted
their profits elsewhere to dodge their tax payouts in UK.
The proposed DPT is also colloquially referred as “Google Tax” since Google Inc. alone has been
divertingaroundUSD5 billionayear fromUK to Ireland (which does not levy tax on income booked on
subsidiaries which are located outside Ireland) and then pays out most of that money to a Bermudan
subsidiary (another tax-haven) as royalties for intellectual property.
Her Majesty’s Revenue & Customs (HMRC) of the UK released the ‘Diverted Profits Tax’ provisions
within its Finance Act, 2015. The provisions state that the tax of 25% will be charged from the entities
whichare artificiallydivertingtheirprofitsfromUK. The proposedlegislation targets the following two
propositions:
 Where a foreigncompany whichsells ‘goodsandservices’tothe customersin the UK structures
itstransactions in such a way that the taxable presence (Permanent Establishment) in the UK is
absent; or
 Where an UK Company (or a Permanent Establishment of the UK Company), structures a
paymenttoone of itsgroup entities,locatedoutside the UK,whichlackseconomicsubstance. In

2. other words, the second limb targets the transactions wherein the UK company artificially
increasing its expenditure through intra group payments so as to reduce the UK tax liability.
The DPT has also prescribed various objective tests to determine the diverted profits:
a) The 80% payment test- This test is to ensure that the provisions of DPT applies only
when the tax reduction is substantial i.e., at least 80% of tax reduction in the hands of
the UK Company or PE of the UK company or avoided PE of the UK company.
b) Transaction based test- This test is applied to find out whether the benefit of the tax
reduction in a transaction (or a series of transaction) is more than any other financial
benefit.
c) Entity based test- This test is applied to find out whether an entity which enters into a
transaction where its contribution of economic value is less than the value of tax
reduction
Notification Requirements
Althoughthere isnonecessityforthe tax payerstoself assessforthe purposesof DPT,the provisions do
lay down certain obligations on the tax payers to notify the HMRC regarding the arrangements and
transactions that may be subject to the DPT.
Such notification must be made within six months from the end of the relevant accounting period for
the period ending on or before March 31, 2016. As regards the accounting period ending after March
31, 2016, the notification must be made within three months.
The newlegislationdoesalsostipulate penalties if the notification as referred to above is not made by
the tax payer.

3. The illustrative examplesprovidedbythe HMRC’sInterimGuidance tothe DPT can be referredforan in-
depth analysis of the DPT provisions1
One mustbe mindful of the factthat the recentIndianUnionBudget2015 hasproposed an amendment
to tax the foreign entitieswhichare controlledfromIndia.The existing provisions state that a company
is said to be resident in India, if it is either an Indian company or its control and management situated
wholly in India.
However, under the proposed Union Budget 2015, a company would be considered to be resident in
India,if itis eitheranIndiancompanyor its‘Pointof Effective Management(POEM)’ is in India. Further,
the expressionPOEMhasbeenexplainedasa place where key management and commercial decisions
that are necessary for conduct of the business of the entity as a whole are made.
-x-
1https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/385264/technical_note_measu
re_2148.pdf