Autumn Statement 2014: Avoidance by multinational enterprises

Diverted profits tax

The government intends to go further in ensuring that multinational companies using artificial arrangements to divert profits overseas, pay the right amount of tax. With effect from 1 April 2015, a new ‘diverted profits tax’ applicable at a rate of 25% will be charged on profits which are generated by multinationals from economic activity carried out in the UK and which are then artificially shifted out of the country.

The government has stated that it is committed to ensuring that multinational companies pay their “fair share” of tax and it envisages that this new diverted profits tax will raise over £1bn over the next five years. It will be fascinating to see how these rules will operate in practice and, particularly, how artificial arrangements and shifts in profits are defined.

Implementing G20-OECD BEPS project

In 2013, the Organisation for Economic Co-operation and Development (OECD) and G20 countries adopted a 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS). The Action Plan aims to ensure that profits are taxed where the economic activities generating the profits are performed and where value is created.

As part of the government’s steps towards supporting the G20-OECD BEPS project, it has been announced that the OECD model for country-by-country reporting will be implemented to assess tax avoidance risks and improve transparency in respect of multinational companies’ tax affairs. The government will also consult on the introduction of the new anti-hybrids rule aimed at exploiting differences between countries’ rules to avoid tax.

These announcements are in line with the government’s sustained action to tackle tax avoidance and are expected to be part of a wider international effort to curb tax avoidance and evasion by multinational companies.