New UK “Google Tax” on Diverted Profits


In December 2014 the Chancellor announced in his Autumn Statement that a new tax, to be called Diverted Profits Tax (DPT), would be introduced with effect for profits earned after 1 April 2015. The policy behind the new tax is to ‘counteract contrived arrangements used by large groups (typically multinational enterprises) that result in the erosion of the UK tax base’.

The tax will be at a rate of 25% (5% higher than the main rate of corporation tax will be by 1 April 2015), which suggests that not only is this tax designed to recoup lost tax revenue, but also to penalise those who engage in the ‘contrived’ arrangements targeted.

Draft legislation was published in mid-December following the Autumn Statement and comments are invited on that draft until early February 2015.

Proposed scope

The proposed legislation contains a complex system of tests to determine whether the DPT can be charged, but in very broad terms it is intended to apply where either (i) a foreign company has avoided having a UK taxable presence; or (ii) where transactions take place between entities and either the entities or the transactions lack economic substance.

In the first case, the test is based on whether it is ‘reasonable to assume’ that the activity has been designed to avoid a permanent establishment in the UK. This ‘reasonableness’ test is similar to a formulation used in other UK anti-avoidance legislation, but criticised for being rather vague.

In the second case, the test has, what looks to be, a more objective set of criteria. However, it still contains a question of whether it is ‘reasonable to assume’ that particular things would, or would not, have been done in the absence of a particular tax result.

There are exemptions: for the first case for companies that have UK sales of less than £10m per year, and, for both cases, for companies that are small or medium sized enterprises.

Interaction with other initiatives

The news reports over the last year regarding large groups not paying their ‘fair share’ of tax in the UK led to a huge amount of work by the G20 and the OECD on what has been called the BEPS Project (Base Erosion and Profit Shifting). The BEPS Project was intended to address the shifting of profits from a jurisdiction where there is a high tax rate (and a company has high presence and commercial activity) to a jurisdiction where there is a low tax rate (and the company has limited presence).

Many commentators have said that the DPT cuts across the work the BEPS Project had sought to undertake and such a move may prove to be unpopular with other countries who may now act unilaterally to introduce rules similar to the DPT to protect their own tax base.


It seems clear that the DPT is aimed at the likes of Google, Starbucks and Amazon, who have all been in the news in the UK in relation to their high perceived presence, but their, reportedly, low UK tax bill. The work of the OECD and the BEPS Project was intended to make changes to international tax rules in order to prevent structures that are no longer deemed appropriate and to encourage businesses to pay tax in the ‘right’ jurisdiction given the global, and increasingly digital, nature of the economy.

The legislation is open for consultation until early February 2015 and there is no certainty that it will remain the same following that process. For now, there seems to be little that the large multinationals at which this new tax is aimed can do to plan for its intended introduction in April 2015.