Diverted profits tax

Finance (No. 3) Bill – in a Public Bill Committee at 12:30 pm on 29th November 2018.

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Question proposed, That the clause stand part of the Bill.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss the following:

Amendment 46, in schedule 6, page 220, line 2, leave out paragraph 11.

This amendment removes the proposed extension of the review period to 15 months.

Amendment 37, in schedule 6, page 220, line 26, at end insert—

“13 The Chancellor of the Exchequer must review the expected change to payments of diverted profits tax and any associated changes to overall payments made to the Commissioners arising from the provisions of this Schedule, and lay a report of that review before the House of Commons within 6 months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the effect on public finances of the diverted profits tax provisions in this Bill.

Amendment 40, in schedule 6, page 220, line 26, at end insert—

“13 The Chancellor of the Exchequer must review the expected revenue effects of the changes made to diverted profits tax in this Schedule and lay a report of that review before the House of Commons within six months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the effect on public finances on the provisions in Schedule 6.

Amendment 41, in schedule 6, page 220, line 26, at end insert—

“13 The Chancellor of the Exchequer must review diverted profits tax against its policy objectives and lay a report of that review before the House of Commons within six months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review DPT against its policy objectives.

Amendment 42, in schedule 6, page 220, line 26, at end insert—

“13 The Chancellor of the Exchequer must commission a review comparing diverted profits tax against a Digital Services Tax and lay a report of that review before the House of Commons within six months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review DPT against the Government’s proposed Digital Services tax.

Amendment 43, in schedule 6, page 220, line 26, at end insert—

“13 (1) The Chancellor of the Exchequer must commission a review on the matter specified in subsection (2).

(2) That matter is the effects on the public finances of the the provisions in this Schedule coming into effect in the tax year 2019-20 compared to previous or subsequent tax years.

(3) The Chancellor of the Exchequer must lay a report of the review under subsection (1) before the House of Commons within six months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the impact of introducing this measure in 2019-20.

Amendment 45, in schedule 6, page 220, line 26, at end insert—

“13 After section 105 insert—

(1) The Commissioners must provide information to the Treasury listing those companies that have made payments pursuant to a charge of diverted profits tax, and the amounts of those payments.

(2) The Treasury shall publish a register of companies paying diverted profits tax based on the information provided by the Commissioners under subsection (1), and shall make that register available to the general public.”

This amendment requires the publication of a public register of those companies that pay diverted profits tax.

That schedule 6 be the Sixth schedule to the Bill.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Clause 18 makes changes that will ensure that the diverted profits tax continues to prevent multinationals from diverting profits from the UK to artificially and unfairly lower their tax bill. The Government have created a tax system that rewards entrepreneurship, drives growth and is based on low corporation taxes, but does not tolerate any company or person exploiting the rules to avoid paying their fair share. In 2015 we therefore introduced DPT, which counters aggressive tax planning by multinationals. It is targeted at particular behaviours and arrangements, not at particular taxpayers or sectors.

DPT has been a success. Every year, HMRC publishes statistics on the revenue that it has raised, and every year they show that it has raised more than originally forecast. Last year alone, it raised £388 million—40% more than in 2016-17. Clause 18 will ensure that DPT continues to prevent multinationals from exploiting our tax system and continues to raise money for our vital public services.

When Parliament introduced DPT, it was intended that diverted profits would be subject either to DPT or to corporation tax, but not both. Concerns have been raised by some commentators that the current legislation does not make that clear. Clause 18 will put it beyond doubt by clarifying that diverted profits subject to DPT are not also liable to CT.

When DPT is charged, companies are required to pay up front before they can lodge a dispute with HMRC during the DPT review period. DPT incentivises companies to agree adjustments to their CT return during the DPT review period and thus pay the correct amount of corporation tax on their diverted profits, thereby removing such profits from the DPT charged. That reduces the likelihood of costly and time-consuming litigation, while ensuring that companies pay the right amount of corporation tax in the UK. Clause 18 will reinforce that incentive by allowing taxpayers to formally amend their tax return to bring diverted profits under corporation tax during the first 12 months of the review period.

The arrangements to which DPT applies are often complex, and in some cases the current 12-month review period is insufficient to reach a resolution. At present, taxpayers are able at any point during the 12-month period to provide HMRC with information that it must take into account in determining the final tax charged. Clause 18 will extend the DPT review period by three months, ensuring that HMRC has enough time to tackle even the most contrived and complex arrangements. The final three months will be reserved for HMRC alone to consider the arrangements and determine the right amount of tax to be paid.

Amendment 46 would remove the proposed extension of the review period. Because companies pay DPT up front, it is in their interest to resolve cases quickly during the DPT review period. Furthermore, the time available to a company to amend its tax return will remain at 12 months. The extension of the review period is necessary to ensure that HMRC has enough time to tackle complex tax-driven arrangements used by businesses in an attempt to unfairly reduce their UK tax bill. This modest extension provides no new power or relief for taxpayers.

Finally, we have become aware that in a limited number of cases, the current DPT legislation might allow DPT to be inappropriately reduced after the end of the review period, which would undermine the purpose of the regime. To date, no tax has been lost as a consequence of this, and the changes made by the clause would ensure that tax is not lost going forward.

Amendments 37 and 40 would require the Government to lay before the House a report on the impact on the DPT revenue of the changes made by the clause. I am pleased to inform Opposition Members that we have already prepared and published such an assessment as part of the Budget process. We do not expect the clause to have an Exchequer impact, because these changes would protect yield that is already accounted for.

Amendment 43 would require the Government to assess the effect of the clause on public finances by comparing this year with previous and subsequent tax years. This is unnecessary. As I have already stated, we do not expect the clause to have any material impact on public finances.

Amendment 41 would require the Government to publish a report that reviews DPT against their policy objectives. I do not believe that such a report is necessary. As I have said before, as part of their online policy maintenance, the Government keep all taxes under review. More importantly, HMRC already publishes annual statistics on the amount of revenue that DPT has raised.

Amendment 42 would require the Government to compare DPT with the recently announced digital services tax. As I have already said, DPT is not targeted at a particular sector but at multinationals that undertake aggressive tax planning. By contrast, DST is targeted at certain digital businesses. It is not focused on aggressive tax planning; it is designed to ensure that businesses pay an amount of tax in the UK that reflects the value they derive from UK users. The Government are still consulting on the design of the digital services tax, which is due to be legislated for in next year’s Finance Bill. I am not convinced of the need to compare DPT with DST; nor, given that we are still consulting on the design of DST, do I see that any value in such an exercise.

Amendment 45 would require the Government to publish a public register of companies paying DPT and of the amounts that they pay. The Government believe that we should continue to uphold the long-standing policy that we do not disclose taxpayer information. Taxpayer confidentiality helps to ensure that taxpayers trust HMRC to protect their data appropriately. That trust encourages taxpayers to work with HMRC, increasing its effectiveness in enforcing the law. Therefore confidential information should be disclosed only when it is clear that the benefits of doing so outweigh the disbenefits. We do not believe that such disclosure is warranted in this instance.

Clause 18 and schedule 6 make amendments to ensure that DPT continues to prevent multinationals from pursuing aggressive tax planning that diverts profits, and hence tax, from the UK. I commend the clause and schedule to the Committee.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 12:45 pm, 29th November 2018

I am grateful to the Minister for his explanation of the clause and schedule. Colleagues will be well aware that DPT was introduced back in 2015, following enormous pressure from campaigners, the Public Accounts Committee and the Opposition to ensure that large, multinational companies pay their fair share of tax. DPT focuses on two forms of tax avoidance. The first is where

“a company with a UK taxable presence uses arrangements lacking economic substance to artificially divert profits from the UK.”

The second is where

“a person carries out activities in the UK for a foreign company that are designed to avoid creating a Permanent Establishment” and becoming taxable through that route.

As the Minister set out, the Bill makes a number of changes to DPT. First, the changes attempt to ensure that the rules work more effectively to prevent avoidance arrangements giving rise to planning opportunities from October this year. The changes clarify that diverted profits will be taxed under only DPT or corporation tax from 1 April 2015 onwards; obviously, this is a retrospective tax.

The measures also extend to 38 months the period in which HMRC can issue a preliminary notice stating that it intends to apply DPT in the first category of cases —that is, where taxpayers are believed to be using arrangements lacking economic substance in order to expatriate profits. The Opposition will certainly support that change. As mentioned, however, the measures also extend very substantially—by 25%, from one year to 15 months—the review period for HMRC to work with a company to examine how much profit has been diverted.

Finally, the measures enable the amendment of corporate tax returns to include diverted profits during the first 12 months of the review period, and to allow the inclusion of diverted profits on the corporation tax return of the affected party for the first 12 months of the review period, in cases where a foreign company is believed to have attempted to avoid permanent establishment through artificial methods.

We have tabled a number of amendments to clause 18 and schedule 6. Amendment 45, as was mentioned, would require a public register of firms that have paid the diverted profits tax. Colleagues will remember, I am sure, that when that tax was introduced, it was widely described by the Government as a Google tax. Indeed, journalists were briefed by Government spokespeople using that term. The Minister has argued that DPT is not targeted at any particular sector; that is not how it was described and promoted at the time.

It is not clear to the Opposition whether Google has actually been covered by DPT. Back in January 2016, the then Chancellor of the Exchequer maintained that DPT provided the context for HMRC’s £130 million settlement with Google. Of course, that was announced to great fanfare, but very quickly there was a lot of concern that it was actually a very poor deal for taxpayers, because Google’s settlement with HMRC in January 2016 covered a whole 10 years, from 2005 to 2015, and constituted £117 million in back taxes and £13 million in interest. Fairly obviously, it was not the Google tax, DPT, that led to that settlement, because it had applied for only a twentieth of the time for which the settlement was achieved—just six months of that time. Also, the so-called Google tax had not led to any appreciable unwinding of complex tax structures. Of course, we need to put the £130 million settlement in the context of the then £4.6 billion-worth of UK sales by Google. I appreciate that that is comparing apples with pears, but it does put things in context.

In concluding the deal, HMRC accepted Google’s claim that its UK staff only supported their colleagues in Ireland—something that the PAC discussed at length and which I will not go into here. Suffice it to say that it is contested. Interestingly, that great radical Rupert Murdoch stated that the tax payments by Google were

“token amounts for PR purposes”.

Our amendment is designed to shine a light on which taxpayers have actually been subject to this tax, given the way in which it was presented when it was introduced, so that the public can judge its effectiveness for themselves. It would also provide a first step towards the country-by-country reporting for multinational companies that the Government were forced to accept as a possibility through an amendment to the 2016 Finance Bill, although they have not yet enacted that. They have the power to enact it through that amendment, but have not yet gone ahead with it. This amendment would at least take us a step along the way.

Amendment 40 would require a review of the diverted profits tax against its stated aims; that would include the extent to which it has raised revenue for the Exchequer. It is very similar to amendment 37 from the SNP. The Minister intimated that the revenues coming from DPT were higher than forecast, and that does appear to be the case, but it would be helpful if the Minister could delineate for us the different components of his Department’s assessment of the value of DPT. That is because, as I understand it, there are two components to its reported value: the direct tax take from DPT itself and the additional tax resulting from altered company tax practices. It is not clear to me whether that is just about the extra corporation tax or something else, so perhaps the Minister can illuminate it for us.

It would also be helpful if we could understand why there has been such an increase in the projected number of taxpayers coming under the measure. Anecdotally, many tax practitioners have told me that they do not think that it is necessarily covering the very biggest firms—many had anticipated that it would do so—particularly digital firms, but it is covering a large number of other firms. To that extent, it seems to be quite different from the initial prospectus, so can the Minister explain why, on this issue, George Osborne seems to have got things wrong? I admit that that was not an isolated occurrence, but it would be helpful if the Minister could explain it.

George Osborne, when DPT was introduced, said that it would also act as a catalyst for the restructuring of companies that were seeking to avoid permanent establishment in the UK and to claim false economic substance in low or no-tax jurisdictions to avoid UK corporation tax. We have not, from what I can see, had any evaluation of DPT’s impact in connection to that. I have not heard of many significant changes in corporate structure that can be specifically attributed to DPT. They may well exist, but we need to know about them in order to have an appropriate understanding of the efficacy or otherwise of the measure. That is what is called for in amendment 41. Related to discussion around our previous amendment, if increased tax from alterations in corporate structure is counted as part of the revenue from DPT, surely it is important for us to know what those alterations in corporate structure are in the first place. I think that would be helpful for the Committee.

Amendment 42 requires a review of DPT’s effectiveness as against the Government’s proposed digital services tax—DPT versus DST, as it were. Colleagues will, of course, be aware that DST has not been included in the Bill; it is only being consulted on. Strangely, at the same time as saying that that tax would impel other countries to implement similar provisions by starting a conversation on the merits of novel approaches to taxing digital giants, the tax includes some weaknesses that, it seems to me, do not apply to the European approach. It is set at 2% of revenues, rather than at 3%. It also includes the so-called safe harbour provision, which means that it is not paid by companies that do not indicate that they are making profits. That is exactly how many of them have avoided corporation tax, so how such a measure would catch many of those companies is unclear to me.

Our amendment would ask for an explicit comparison of DPT with DST. That is surely necessary given that they embody fundamentally different assumptions about the appropriate basis for corporate taxation. DPT assumes that transfer pricing is still alive and kicking, and a tenable basis for assigning taxing rights, while DST obviously uses a particular form of revenue as the taxable quantum, rather than profit. That is surely necessary in a context where there are many discussions ongoing at an international level about the appropriate basis for corporate taxation, including whether there should be a greater focus on value derived from branding. I understand that has some support on the US side.

I will briefly describe our two additional amendments in the three minutes that remain. Amendment 46 removes the extension of the review period during which the taxpayer can make representations to HMRC about why its assessment is invalid. Despite what the Minister said, I do not think that we have been provided with sufficient evidence about why that is necessary. If there is a problem with companies providing evidence towards the end of that review period and HMRC is having difficulty crunching that evidence, surely it would be more helpful for those companies to be required to provide the evidence a bit earlier in the process. If evidence being provided later on in the existing review period was causing problems for HMRC, surely that would be one way of dealing with it.

Finally, as the Minister mentioned, amendment 43 would consider the impact of introducing the measures within this specific time period as against another. Again, we feel that we have not been provided with a sufficiently clear rationale for the timing, so it would be helpful to learn more about the implementation schedule set out within the Bill.

Ordered, That the debate be now adjourned.—(Craig Whittaker.)

Adjourned till this day at Two o’clock.