[author: Noor Al-Banna]

The Diverted Profits Tax (DPT) has been a significant area of focus for taxpayers and tax authorities in the UK and Australia. The tax targets specific situations in which taxable profits are alleged to have been “diverted” from the tax jurisdiction in question. The tax, also known as a “Google Tax”, was enacted in the UK in 2015 and Australia in 2017. In the UK, beverage company Diageo was the first firm to be assessed under the DPT and paid HMRC (His Majesty’s Revenue & Customs) £107 million in 2017, an assessment that was later challenged.

HMRC just released its responses to a public consultation that covered reforms to the DPT along with other transfer pricing issues. While the DPT was historically a standalone tax, HMRC indicated that it will remove the DPT’s status as a separate tax and bring an equivalent charge into the Corporation Tax. HMRC stated that this change is intended to clarify the relationship between the taxation of diverted profits and transfer pricing. The change will provide access to treaty benefits while maintaining key features of the regime. HMRC noted that although the DPT will no longer be characterized as a standalone tax, it “remains a useful tool for HMRC in encouraging multinational enterprises (MNEs) to pay tax on their economic activities in the UK.”

One of the primary situations where the DPT may come into play are those in which intellectual property (IP), and thus royalty withholding tax (RWT) is involved. The Federal Court of Australia recently published its judgement in PepsiCo, Inc. v. Commissioner of Taxation. This is the first time an Australian court has considered the diverted profits tax. Ocean Tomo, a part of J.S. Held, was engaged as an expert witness by Australian law firm MinterEllison on behalf of the Commissioner of Taxation who was successful in the proceedings. This decision confirmed that PepsiCo, Inc. is liable for royalty withholding tax and, in the alternative, diverted profits tax would apply.

As tax authorities continue to focus on the application of DPT and RWT in various forms, multinational enterprises should consider the impact of recent legislation and jurisprudence on existing IP transfer and licensing arrangements that address the use of assets such as brands, software, patents, etc.