UK multinational and alcoholic drinks producer Diageo is the first company that will have to make an upfront tax payment to UK tax authority, HMRC, before it can challenge preliminary notices of assessment issued under the diverted profits tax (DPT) regime.
Diageo, which owns brands such as Johnnie Walker, Smirnoff, Captain Morgan and Guinness, had been discussing its transfer pricing position and related issues with HMRC to seek clarity on those issues, but the drinks giant said it has learned that the tax authority plans to issue preliminary notices of assessment under the DPT regime, which came into effect in April 2015.
The dispute relates to the company's profits that have been moved from the UK to the Netherlands, where it has 220 employees.
The company will have to pay approximately £107 million ($138 million) in additional tax and interest payments in aggregate for the financial years that ended on June 30 2015 and June 30 2016, it said in a statement.
"Diageo does not believe that it falls within the scope of the new diverted profits tax regime," it said. "Accordingly, Diageo will challenge the assessments when they are received. In order to do this, it will be necessary to pay the full amount assessed up front and then continue to work to resolve this matter with HMRC. The payment of this sum is not a reflection of Diageo's view on the merits of the case and, based on its current assessment, Diageo considers no provision is required in relation to diverted profits tax," the company said.
DPT: A controversial tax
The controversial tax charges a 25% DPT on the profits of a multinational if the profits are considered to be artificially diverted from the UK. Once HMRC issues a notice to the businesses, the company is required to pay the tax bill before it can challenge the assessment.
"Under the novel requirements of the legislation a company is obliged to notify HMRC if DPT applies. Whether they choose to or not HMRC can then issue a charging notice, the tax on which must be paid within 30 days with no right to postponement," said Ken Almand, international tax partner at RSM UK. "There then follows a 12-month period when the charge can be reduced or amended."
"In a nutshell, this means that a company has to pay the tax upfront whether or not they believe it is correctly due. Given that the measure was trumpeted as an anti-avoidance rule by HMRC this may give rise to reputational risks as well as tax and cashflow costs. Companies may be obliged to publish the fact that they have received a notice and potentially labelled as a tax avoider even though it may later be agreed that there has been no avoidance or DPT due," Almand continued.
"There was quite a fuss when the UK government first announced the diverted profits bax back in 2014, not long before the last general election. The UK was accused of jeopardising the OECD's BEPS plan, acting as a global tax police force and harming inward investment. It has all gone a little quiet since but it is back in the headlines now that HMRC has started to issue charging notices to companies," said Almand.
A lengthy dispute
John Kavanagh, a director with Enterprise Tax Consultants, said that whilst the size of Diageo's tax assessment was "eye-watering" it did not mark a conclusion to the case and is almost certainly the beginning of a lengthy dispute.
"It's interesting that many of the companies who might be hit with a DPT demand are likely to have very deep pockets and will not necessarily be inclined to roll over and pay up," Kavanagh said. "They may well choose to fight HMRC to the bitter end on this and that means we may not see a resolution to this matter for some years to come."
As this is the first case of a company being forced to pay the UK's DPT, multinationals will surely follow any ensuing dispute closely.
"HMRC has two years from the end of an accounting period to issue charging notices (or four years if there is no notification)," said Almand. "Given that HMRC's DPT team apparently contains 40 specialists and they are clearly issuing charging notices some large multinationals may be watching nervously for the postman. As ever, the best defence is likely to be proper preparation and if the worst happens ensure that both the tax and the PR teams are ready to take appropriate action."
