INTM489630 - Diverted Profits Tax: application of Diverted Profits Tax: legislation – Finance Act 2015 – core provisions: consequences of section 80 or 81 applying - section 82 - key definitions

Sections 83 to 85 employ concepts that are first introduced in section 82. The key terms are:

• “Diverted profits”: defined as including amounts chargeable to corporation tax as a result of adjustments required by Part 4 TIOPA 2010 (which per s111A Finance Act 2015 includes any other adjustments required by other tax rules, provided a transfer pricing adjustment would have been needed in the absence of those rules) and where s81 applies, amounts attributable to the UKPE.
• “The relevant alternative provision”: This means the alternative provision that it is just and reasonable to assume would have been made or imposed, as between the relevant company and any connected companies, instead of the material provision, had tax on income not been a relevant consideration for any person at any time. The words “at any time” are designed to prevent companies from arguing that current (non-tax) synergies that were not anticipated when the structure was planned or implemented should be taken into account when determining whether the material provision in question would have been undertaken had tax not been a consideration. In other words, current unforeseen non-tax benefits cannot be used to justify historic and ongoing avoidance. An example illustration of the relevant alternative provision is outlined in INTM489795.

In some cases, had tax not been a consideration, no transactions at all would have been undertaken. The legislation makes clear that this is to be treated as an alternative provision.

“The actual provision condition” is met if the material provision results in the relevant company having expenses that would (ignoring any transfer pricing disallowance) be allowable in its tax computation and the relevant alternative provision:

• would also have resulted in allowable expenses of the relevant company of the same type and for the same purpose as the actual expenses (that give rise to or contribute to the effective tax mismatch outcome), and
• would not have resulted in “relevant taxable income” of a connected company.

So, for example, the actual provision condition would be met if a company incurs an actual royalty expense for use of an asset and the relevant alternative provision would also have resulted in the company paying a royalty for access to an equivalent asset, even if the contractual framework would have been structured differently, the amount would have differed and/or it would not have been payable to the same person. In addition, for this condition to be met, the relevant alternative provision must be a provision that would not have resulted in relevant taxable income of a company connected with the relevant company.

“Relevant taxable income” means income of a company connected with the relevant company which would have resulted from the relevant alternative provision and would have been within the charge to corporation tax less expenses that would have been incurred in earning that income.