Labour will be "constructive" in implementing diverted profits tax, says MP

The new tax on multinationals was announced by the UK chancellor in his Autumn Statement in December. It is intended that the new 25% tax will apply from 1 April 2015 where a foreign company "exploits the permanent establishment rules" or where a UK company or a foreign company with a UK-taxable presence creates a tax advantage by using transactions or entities that "lack economic substance". The government says it intends that the provisions will be in a Finance Bill that is passed before the general election on 7 May.

The adjournment debate had been requested by Conservative MP Nigel Mills. He explained that he had requested the debate because the short timetable for the pre-election Finance Bill would mean that there would be little time to debate the provisions, which were published in draft on 10 December.  An adjournment debate is a way to have a general debate in the House of Commons on a topic and to obtain a response from a government minister without requiring the House of Commons to vote.

The Budget will be on 18 March and parliament is due to be dissolved on 30 March so there will be a period of less than two weeks for a pre-election Finance Bill to go through the parliamentary process.

Mills outlined a number of concerns about the draft rules that had been expressed by commentators, including concerns about whether the new rules would survive a challenge under the UK's double tax treaties or under EU law, concerns the rules were too wide and about the assessment and collection process.

Shabana Mahmood said that Labour recognised that there was a significant issue with multinational companies avoiding UK tax but asked why the government was not waiting for the outcome of the base erosion and profit shifting (BEPS) project before proceeding with unilateral action. She asked whether the Treasury had researched whether the UK could be a "net loser" if other countries introduced retaliatory measures.

BEPS refers to the shifting of profits of multinational groups to low tax jurisdictions and the exploitation of mismatches between different tax systems so that little or no tax is paid. Following international recognition that the international tax system needs to be reformed to prevent BEPS, the G20 asked the Organisation for Economic Co-operation and Development  (OECD) to recommend possible solutions. It is intended that the BEPS project will conclude its work by the end of 2015.

Andrea Leadsom, the economic secretary to the Treasury, said that the UK was not giving up on BEPS and the government "is committed to multilateral action" and the new tax will be "entirely complementary to the BEPS process".

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said: "None of the representatives of the three main political parties explained why the diverted profits tax legislation needs to be in a pre-election Finance Bill, rather than allowing proper time for debate".

Liberal Democrat MP Ian Swales raised a number of concerns about how the tax would be calculated, suggesting that it was likely to lead to a "legal quagmire" and questioning whether HM Revenue and Customs (HMRC) would have the resource to deal with it. Affected companies must notify HMRC within three months of the end of an accounting period in which it is "reasonable to assume" that diverted profits might arise. If HMRC thinks there is a liability to the tax it issues a preliminary notice against which the company can make representations only on limited grounds.  A formal notice is then issued, and over a 12 month review period detailed discussions can be held with HMRC as to the tax liability, but the tax has to be paid in the meantime.

Self said: "The draft legislation is currently too widely drawn. It should be stated clearly in the legislation that it is aimed only at contrived and artificial arrangements".

Ian Swales queried why financing structures enabling interest deductions to be obtained had been excluded from the new rules as they are one of the main causes of BEPS.

Heather Self said that the comments made by Ian Swales give some insight into the position of the Liberal Democrats in relation to Action 4 of the BEPS action plan in relation to interest deductions. She said "the proposals on interest relief are one of the most critical issues for UK companies, and will need to be monitored closely over the next few months”.

 In July 2013, the OECD published a 15 point Action Plan and the first formal proposals dealing with seven of the 15 specific actions were published in September 2014. Action Point 4 of the OECD's action plan is limiting base erosion through interest deductions.

In December the OECD issued a discussion draft on interest suggesting that tax deductions for interest payments could be restricted on a group wide basis, by reference to a fixed ratio, or by a combination of these two solutions.