DPT is a new and separate tax introduced by the UK as a response to the OECD’s Base Erosion and Profit Shifting (BEPS) agenda. However, it closely interacts with both existing and new tax rules such that the impact of these interactions also needs to be carefully considered.
The most notable interactions are with Transfer Pricing, Permanent Establishments, Royalty Withholding Tax and Anti-Hybrids rules. As other territories introduce new and amended rules in response to the BEPS agenda, the impact of other legislation will continue to be felt. As such, considering DPT in the context of wider UK and international tax rules will become increasingly important.
There is significant interaction between DPT and transfer pricing - from the initial identification of DPT issues which would be considered during HMRC’s transfer pricing risk review until the moment when a DPT charge is calculated.
In certain cases, a DPT charge could be eliminated by a transfer pricing adjustment, but it is not always the case.
Calculations of DPT preliminary notices are based on the “best estimate that can be reasonably made at that time” by a HMRC officer, which could be based on transfer pricing principles, but not necessarily. It is important to mention that the inflated expenses rule can apply in certain cases. This is a rule that automatically disallows 30% of the relevant expense that has given rise to the effective mismatch outcome. In some cases, it can produce an unrealistically high level of diverted profit DPT which has to be included in the preliminary notice.
