Diverted Profits Tax

Ian Swales Excerpts

Wednesday 7th January 2015 Westminster Hall

[Ian Swales (Redcar) (LD)]

It is a pleasure to serve under your chairmanship, Mr Turner. I, too, congratulate the hon. Member for Amber Valley (Nigel Mills) on securing the debate. His initiative is excellent, given the enormity of what is proposed.

There is something of a crisis in corporation tax: globalisation, the European Union and the internet have all given many more opportunities to move tax or profits around. In the days since I was a global finance director in 1996, we have seen a lot more predatory activity by advisers and companies. They seem to be far more shameless about carrying out transactions without a commercial basis. With my training, I would have said that that was already a problem, even without any new legislation, but companies seem quite happy to do such transactions, to the extent that a year or so ago the chief executive of WPP could describe the amount of tax paid as “a question of judgment”, which tells us a lot about the amount of flexibility that he could see in the system.

Moreover, the chief executive of Google famously boasted about avoiding £2 billion in tax in a single year. He seemed to have no concept that that meant £2 billion in cuts to public services in the all countries in which his company operates, or the same amount more in tax that other companies and individuals in those countries would have to pay. The climate seems to be changing, although the Prime Minister’s business advisory group still includes that chief executive. I wonder whether he had any input into the new policy and what he thinks of it.

After the measure was announced, Newsweek commented on 26 December:

“The British government, after a search, says it knows how to tax profits Google earns in the United Kingdom. Its solution is simple and elegant, and it probably won’t change a damn thing.”

That view is perhaps overly cynical, but it backs up a point made by several Members: the expectation is that companies will take other measures rather than lie down and pay the tax. That is a huge issue.

The hon. Member for Amber Valley was right to mention the question of how on earth the tax will be calculated. City experts are already saying that the calculations will lead to a “legal quagmire”—that is one expression I have seen used. In other words, when HMRC comes up with an assessment the lawyers will probably start work. I wonder whether HMRC has budgeted sufficiently for the resources that it will need to make the tax stick. It could be involved in lengthy legal cases with expensive lawyers paid by large companies.

That leads us to the main question concerning this tax. When I was trained as an accountant, we were told that the one principle a tax system needs is certainty. In other words, it should be clear what a company is doing and what the tax on that will be; the company can then pay that tax. Certainty is one of the functions of a good tax system, but with the diverted profits tax we are straying into an area of high uncertainty about how the tax will be assessed and paid. The hon. Gentleman made an excellent point about our ability to collect the money: by definition, it could be all over the place and not in the UK. That leads us to the question of the confidence the Minister has in our ability to collect the money—I am interested to hear her comments on that.

[David Mowat]

The hon. Gentleman has made an interesting point about certainty and also about the difficulties that globalisation and the internet have caused for gathering corporation tax. Is there a case for the international community to give up on corporation tax and instead have higher taxes on sales and, if necessary, dividends, so that the tax is still raised in the end but we do not have a continual process of chasing money across international boundaries, which, for the reasons he has given, is time consuming and perhaps counter-productive?

[Ian Swales]

I take the hon. Gentleman’s point on board. I know that some commentators believe the right way to go is to scrap the incredibly complex system that we have. Although that might be where we end up, I would like to see country-by-country reporting introduced first, so that we know what activity companies are carrying out in each country, and where they are trading and are declaring their profits will be transparent to the world at large. That would help tax authorities; also, the problems companies would then have with reputation management would cause quite a shift. I would like to see that country-by-country reporting first, but perhaps we will end up in the position that he has suggested.

The estimate is that the tax will raise £1 billion over five years. That is a very small amount given the scale of the issue. One commentator has suggested that Google alone could be assessed as owing around half that figure. The Financial Times has found that in 2012 seven US technology companies paid only £54 million in tax on UK sales of $15 billion. I am aware that corporation tax is levied not on sales but on profits, but the companies we are talking about typically make 20% profit or more on sales, so we could quickly come up with a large number there. Will the Minister tell us how the assessment of the amount the tax will collect was made? What assumptions sit behind it? The figure seems small given all the relevant issues, which we are well aware of.

The hon. Member for Amber Valley rightly mentioned EU law. I will not repeat what he said but there is clearly the potential to challenge the tax through the EU. When one talks to global finance directors, there is no doubt that financing structures and interest payments are the tax avoidance measure of choice—they are how the largest diversion of profits occurs. Will the Minister explain why offshore finance centres and excessive foreign interest payments have been specifically excluded from the diverted profits tax? I welcome the moves that have been made, but a large area has not been addressed by the tax.

I will mention a few other aspects of profit diversion. The Minister may tell us that they are included, but my guess is that most are not. There are well documented loopholes used by banks for tax arbitrage between countries, particularly between the UK and the US, because different instruments are taxed differently in the two countries and by shuffling money backwards and forwards it is possible to create beneficial tax arrangements. Will the legislation address those loopholes? Does the legislation deal with hybrid entities, for which there are similar opportunities because of the different taxation of legal structures between different countries? They are another method that the financial services sector in particular uses to shift profits.

Some of the issues connected to Luxembourg have been mentioned already, but will the Minister address the issue of the wholesale tax avoidance and profit diversion that, for example, sees Vodafone holding five times as much capital in Luxembourg as the GDP of Luxembourg, although it does no trading there? That kind of thing enrages the public, and it is high time it was addressed. When will she get the EU to deal with the preposterous activity going on in Luxembourg behind its so-called headline corporation tax rate of 29%?

The Channel Islands have already been mentioned. The particular point I want to raise is that the majority of contracts for UK private finance initiatives are now financed from those islands. That makes a mockery of the Green Book assumptions about PFI tax recovery; it is assumed that a very high figure—I think it is 6%—will come back to the Treasury in tax receipts, but that assumption completely ignores the fact that PFI deals are routinely moved to the Channel Islands, including those for 50% of the schools in my constituency, which are apparently owned in Jersey.

Those are just a few of the arrangements that may or not be covered by the diverted profit tax legislation. I suspect most are not, but they illustrate the fact that there is a lot more yet to do.

Diverted profit arrangements do not simply cost tax or allow profit diversion; they incentivise offshore acquisition and ownership of UK businesses. These days, highly profitable UK businesses have to create some offshore financing or else somebody else will do it for them, as predatory takeover activity in the UK is often predicated on offshore finance structures designed to move taxable profits out of the country. A good example would be Betfair. Last year, a company was looking to take it over in an aggressive takeover. I wondered what the company was going to add in terms of betting technology or new IT, but the clue was the name: “So-and-so Partners, London and Luxembourg”. The factor the takeover was going to add was the shifting of Betfair’s profits away from the hands of the Treasury. In the end, that takeover did not go through, but the diversion of profits affects business ownership and competition in the UK.

I mentioned the amount that the tax is expected to raise. I think the figure is low because of what are traditionally called behavioural effects—in other words, what companies may do as a result of the tax—and so I am interested to hear more from the Minister on what the Treasury thinks will happen, as opposed to the idea that companies will simply sit there and pay the tax. What kind of measures does the Treasury consider companies might take?

How will the success of the tax ultimately be measured? As the hon. Member for Amber Valley rightly said, it could well be that the real success of the legislation will appear not in diverted profit tax receipts but as higher corporation tax receipts. Does the Treasury have any way of judging how the measures have played out?

I welcome what is happening and hope that the Government will do more. I have mentioned country by country reporting, and that has begun to happen in the financial services sector. It is driven partly by other countries’ legislation. I hope it will expand through the work of the OECD and pressure from our Government, and in the operation of companies around the world will become more transparent. We should push for that.

John Cridland, the head of the CBI, said about a year ago that he was confused and did not know what the Government wanted on tax. I do not think that it is confusing at all. We want companies to account for their UK activities in the UK and pay tax on the profits that they earn in the UK. It could not be any simpler. I addressed the CBI tax forum two or three months ago and made that point. I said bluntly that if its companies were doing otherwise, we would steadily be coming after them.

The Government have a record of at least moving in the right direction. I was a member of the Public Accounts Committee for more than four years and took part in scrutiny of large companies and tax advisors; judging by the culture and attitudes out there, we still have a long way to go. I vividly remember asking a tax advisor how many of the schemes that he had advised individuals and companies to adopt in the previous few years had been made illegal; he cheerfully said it was all of them. It is good news that HMRC keeps pinning those things down, but the fact is that there is an industry out there constantly looking for new ways to avoid the taxes that we try to levy. I hope that the Treasury will make its proposals work, and will continue to recognise that there is still much more to do.

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[Shabana Mahmood]

I am grateful to the hon. Gentleman for giving me the opportunity to highlight Labour policy in this debate. A few months ago, we published a paper on corporate taxation that included a section on the Crown dependencies and overseas territories. We have made the commitment that, if we win the general election, we will require the Crown dependencies and overseas territories to publish a public register of beneficial ownership. That is the key demand of all in the wider tax justice and fairness community, and it would shine a light on the true owners of businesses based in the Crown dependencies and overseas territories. The Government have spoken a great deal about doing something similar, but I think it is fair to say, without being party political, that progress has stalled. We have gone further by saying that we will ensure that that process happens. I have already taken the conversation forward with Ministers and other officials from the Crown dependencies and overseas territories.

[Ian Swales]

The hon. Lady makes an interesting point. Recently, I met officials from Jersey and Guernsey, and although transparency might be part of the issue, a lot of the arrangements that shift profit out of the UK are totally transparent. The issue is not transparency, but the arrangements themselves and, for example, the allowance of huge interest payments. I know that the debate is not about Labour party policy, but since we have strayed into that area, would her party do anything about such arrangements? A lot of them occurred under the Labour Government’s watch.

[Shabana Mahmood]

Of course we will look at particular arrangements, but transparency is the starting point. The Prime Minister famously said that

“sunlight is the best disinfectant”.

There has already been some opposition to our proposals, which suggests that there is real gain to be made from a much more transparent system for the Crown dependencies and overseas territories. That will be our start point, but we will continue to look at the other issues mentioned by the hon. Gentleman.

While we are on the subject, I would be interested to hear from the Minister about the Government’s approach to tax transparency policy with regard to the diverted profits tax. She will know that, in its paper on corporate taxation published a few months ago, the Labour party committed to going a little further on the broader issue of tax transparency and country-by-country reporting of business profits than the Government have done so far. We will support multilateral action, because we think that that is the right start point, but if multilateral agreement is not reached, we are prepared to take unilateral action on public tax transparency.

The Government have fully rejected that approach, saying that it will create too large a burden on business and that, were the UK to take unilateral action on tax transparency and country-by-country reporting, it would negatively affect the UK’s tax competitiveness. The Minister is well aware that both those arguments apply equally to unilateral action on the diverted profits tax. Will she explain why the Government have used those arguments to block potential unilateral action on country-by-country reporting in the form of a public register, but are dismissive of the same concerns when they are raised by others regarding unilateral action on the diverted profits tax?

It is important to understand why the Government think that those arguments do not apply, because although we may disagree with the criticisms made by business, in particular in relation to the diverted profits tax, it is important to understand the values and philosophical thinking behind the Government’s approach, because that will give us an indication of where policy is likely to go. I would appreciate the Minister’s detailed comments on that.

Other hon. Members expressed concerns about the potential for legal challenge. The Minister is aware that there is substantial scope for discretion in the application of the new rules. Although I was not a tax specialist, as a former lawyer, whenever I see the word “discretion” I know that for lawyers it basically means that there is lots of money to be made—a point also made by other hon. Members. What assessment have the Government made of the possibility of challenges within both EU law and the terms of the UK’s various double taxation treaties? My working assumption was that conversations have already been had, particularly in relation to the double taxation treaties. Nevertheless, it would be helpful if the Minister could update us and perhaps also give further details on HMRC resourcing, particularly for known areas of risk of legal challenge.

The Exchequer impact was also mentioned. Given that the draft legislation casts a broader net than was anticipated in the lead-up to the autumn statement, it is unclear why the revenue associated with the measure is quite so low, comparatively speaking. For example, we know that Google and Amazon alone generate somewhere in the region of £7.5 billion of UK revenue between them. A £360 million tax boost at a corporation tax rate of 20% would imply taxable profits of £1.8 billion, which an aggressive interpretation of the rules could attribute to those two companies alone. The projected yield therefore implies some combination of caution and, potentially, significant ongoing royalty deductions from UK corporation tax, behavioural change, and the anticipation of legal challenges. Again, it would be helpful if the Minister could explain exactly what the Government had in mind when modelling the Exchequer impact of the changes.

Avoidance is a continuing issue. Whenever new rules are introduced, one of the first things we must all look for is the potential for avoidance opportunities. One method for avoiding the rules might be the relocation of businesses where the business model does not require a physical footprint in the UK. Have the Government done any work in consideration of such issues? The new rules read much more like a TAAR—targeted anti-avoidance rule. In the past year, I have had a number of discussions in Committee with the Minister’s colleague, the Financial Secretary to the Treasury, the hon. Member for South West Hertfordshire (Mr Gauke), about the use of targeted anti-avoidance rules to support the tax avoidance measures that the Government have introduced, and I have wondered whether we might also end up discussing a TAAR for this particular TAAR. Again, it would be helpful if the Minister could explain where the Government are coming from on that.

Has the Treasury done any modelling to take account of copycat or so-called retaliatory legislation from other countries? Could the UK ultimately be a net loser? We have some intellectual property-heavy sectors in our country, particularly pharmaceuticals and media. If other countries introduce similar rules, that would affect the UK, potentially making us a net loser. I am sure that the Treasury has done some work on such issues; we should know more about them in order to illuminate the debate.

Finally, where does the Minister think the new measures leave the general anti-abuse rule—GAAR—for which the Government legislated earlier in this Parliament? Tax lawyers in particular have commented that we are seeing much more complicated new legislation, rather than better use of existing legislation, including the GAAR and, potentially, transfer pricing rules and other elements of the tax system that people feel are currently not necessarily enforced. The combination of those two measures could have dealt with many of the issues that have been raised. Instead, the Government have decided to introduce an entirely new tax. Where do they think that that leaves the wider legislative framework?

The Opposition’s general approach is supportive, and we will seek to be constructive as we debate these issues further ahead of the Finance Bill 2015.

[The Economic Secretary to the Treasury (Andrea Leadsom)]

It is a pleasure to serve under your chairmanship, Mr Turner, and I wish you a happy new year. I congratulate my hon. Friend the Member for Amber Valley (Nigel Mills) on securing this debate on such an important subject. As a number of colleagues have pointed out, the new measure is designed to ensure that Britain is a very competitive place—in fact, our ambition is to be the best place in the world to start up and run a business. If a company comes to this country, we will charge it low tax rates, but it will be expected to pay. That is what lies behind the measure: to ensure that companies pay that fair rate of tax.

The Government are working to create the most competitive tax system in the G20—a simple, competitive and fair tax system that will support economic growth and investment. However, we then expect companies operating in the UK to pay these fair and competitive taxes, so we are taking action both domestically and internationally. It is not one or the other—one does not rule out the other, as the hon. Member for Birmingham, Ladywood (Shabana Mahmood) suggested it may. We are trying to address concerns about some businesses paying little or no tax on profits made in the UK.

When this Government came to power, Britain had one of the least competitive business tax regimes in Europe. Since 2010, the Government have introduced a series of tax reforms to boost competiveness, such as the patent box, increasing the generosity of research and development reliefs, modernising the UK’s controlled foreign companies regime, and cutting corporation tax from 28% to 21%—next year, it will fall to 20%, the lowest rate in the G20.

The corporation tax reforms were a central plank of our economic strategy, and that strategy is working: growth, jobs and investment are all moving in the right direction. An increasing number of multinational businesses are locating activities in the UK, including companies such as Brit Insurance and Hitachi Rail Europe. The UK is one of the most competitive and attractive countries when it comes to deciding where to base a business.

It is clear that the tax reforms we have made since 2010 are supporting the economic recovery, and that our plan to cut corporation tax again to 20% will lead to more jobs and investment in the UK. Nine out of 10 UK businesses say the corporation tax rate cuts delivered since 2010 have been good for UK competitiveness.

However, as all colleagues have pointed out, there are real public concerns about unfairness in the system, whereby some companies, particularly large multinationals, are seen to be aggressively avoiding tax in the UK. It is vital that the public have confidence in the tax system, and that the tax rules treat both companies and individuals fairly and consistently, without leaving them scope to avoid their obligations. As we seek to return the public finances to balance and reduce the deficit, it is also important to make sure that we collect all the tax that is due. For those reasons, we are taking action, both domestically and internationally, to reform the tax rules and tackle corporation tax avoidance.

The hon. Member for Birmingham, Ladywood asked whether we are therefore giving up on the international tax framework, and of course, as she will know, that is not the case. The current international tax rules were first developed in the 1920s and desperately need reforming, so that they continue to support free trade and ensure a level playing field for businesses, but also to make sure that they address weaknesses such as companies playing different regimes off against each other to avoid paying tax on their profits anywhere at all.

The UK has taken a lead on the international stage to reform these rules and is committed to multilateral action through the G20 and the OECD to tackle the issue of base erosion and profit shifting—known as BEPS. At their summit in St Petersburg last year, the G20 leaders fully endorsed the ambitious and comprehensive BEPS action plan set out over 2014 and 2015. The individual action points are being taken forward by various OECD working parties.

The OECD BEPS project is reviewing the international tax rules to find out where they are not fit for purpose in today’s modern globalised economy. Over 40 countries are collaborating to take forward the action plan: a comprehensive two-year strategy to tackle international tax avoidance.

[Ian Swales]

We constantly hear about the G20 and the OECD, but the Netherlands, for example, is not even a member of the G20. Is the Minister concerned that all this work is going to be focused on certain countries, but that will, in itself, just lead to even more activity in countries that are not party to this process?

--- Later in debate ---

[Andrea Leadsom]

I am grateful to all hon. Members for the points they are making about other tax jurisdictions. What the UK can do is lead the international effort and focus on what we can do to ensure that the UK’s tax base is not eroded. Therefore, although these other points are extremely important, hon. Members will realise that I cannot influence directly the tax laws that Luxembourg undertakes for itself, other than through the contribution the Government make to the international effort to put pressure on different jurisdictions.

The Chancellor announced, in the autumn statement 2014, UK action on two of the internationally agreed 2014 outputs of the BEPS project. I know that the hon. Member for Redcar supports the UK’s introducing legislation to implement the G20-OECD agreed model for country-by-country reporting, which will require multinational companies to provide tax authorities with high-level information on profit, corporation tax paid and certain indicators of economic activity for risk assessment. Draft legislation for the Finance Bill 2015 was published on 10 December 2014, with a tax information and impact note and an explanatory note.

Furthermore, a consultation document on the UK plans for implementing the G20-OECD agreed rules for neutralising hybrid mismatch arrangements—another point raised by the hon. Gentleman—was published at the autumn statement. The new rules will tackle a tax avoidance technique used by multinationals to exploit differences between countries’ tax rules to avoid paying tax in either country, or to obtain more tax relief against profits than they are entitled to.

However, the Government have gone further still. The hon. Member for Birmingham, Ladywood asked whether that was instead of BEPS or because we feel that BEPS will not work, but no, not at all—this is in addition. The Government have gone further to tackle tax avoidance by multinational companies operating here in the UK and to strengthen our defences against the erosion of the UK tax base. That is entirely complementary to the BEPS process. Where companies in the UK are going to extraordinary lengths to avoid paying their fair share of tax, we will act to prevent that. That is why the Government have introduced the new diverted profits tax—to counter the use of aggressive tax planning by large multinationals to avoid paying tax in the UK on profits that have been generated from economic activity here in the UK.

The diverted profits tax will be applied using a rate of 25% from 1 April 2015. The measure is targeted at contrived arrangements used to shift profits away from the UK in a manner that ensures they go untaxed or largely untaxed. The measure is designed to counter the erosion of the UK tax base as a result of complex structures that circumvent the international tax rules on permanent establishment and transfer pricing.

For example, some multinationals have gone for aggressive tax planning that involves quite complicated arrangements, such as the so-called “double Irish”—a point raised by the hon. Member for Strangford (Jim Shannon) and my hon. Friend the Member for Amber Valley—using group companies in other countries as conduits to route expenditure to tax havens so that profits from UK activity goes untaxed.

Specifically, the diverted profits tax applies in two situations. The first is where a foreign company carries out activities in the UK in connection with the supply of goods or services to UK customers in such a way that it avoids creating a permanent establishment, and the main purpose of that arrangement is to avoid UK tax, or a tax mismatch is secured such that the total tax derived from UK activities is significantly reduced. The second situation is where a UK company, or a foreign company with a UK permanent establishment, creates a tax mismatch by using transactions or entities that lack economic substance.

If a multinational company is found to be using those contrived arrangements to avoid tax in the UK, HMRC will issue a notice that requires the diverted profits tax to be paid up front. The legislation provides for a review period of up to 12 months, within which the multinational company will have the opportunity, among other things, to demonstrate that it was not liable for the charge or to provide information to HMRC to show that the level of disallowance of intra-group expenditure in computing the charge is wrong on normal transfer pricing principles. The measure is designed to complement our transfer pricing arrangements.

[Ian Swales]

On the second case the Minister mentions, she can be interpreted as talking about artificial financing structures—for example, moving money to Luxembourg and then loaning it back to the UK—but the briefing note says that the legislation specifically excludes such arrangements. Can she confirm that?

[Andrea Leadsom]

I think I have been quite clear about the purpose of the legislation. I am not aware of the briefing note to which the hon. Gentleman refers. I will address the point again in responses to questions, so perhaps we can deal with it then.

After the 12-month review period, if the charge has not been withdrawn, the multinational company will have the right to appeal the charge at a tax tribunal on any appropriate grounds.

There are some specific exemptions from the tax. A number of hon. Members asked who was exempted. Those will include small and medium-sized enterprises, companies with limited UK sales and the situation where arrangements give rise only to loan relationships. I will come on to that in more detail at the end of my responses to questions. The draft legislation was published on 10 December and will come into effect from 1 April. Comments from industry are of course welcome as we finalise the rules to ensure that they are clear and targeted.

As I said, the UK is fully engaged in the work to reform the international tax framework through the OECD-G20 BEPS project. The introduction of the diverted profits tax is entirely consistent with those principles and complements the ongoing international efforts in the BEPS project, which is looking to align taxing rights with economic activity.

A number of hon. Members questioned the yield that is expected or forecast from the diverted profits tax. The Office for Budget Responsibility has certified the central estimate of tax yield to be £1.35 billion over the next five years to 2019-20. That will contribute to the £31 billion that HMRC has already secured from tackling tax avoidance and evasion by large businesses since April 2010.

Let me answer some specific questions. My hon. Friend the Member for Amber Valley asked whether this measure was in some way overriding UK tax treaties. I can reassure him that that is not the case. The scope of the UK’s tax treaties is limited under UK law to income tax, capital gains tax and corporation tax. The diverted profits tax is therefore not covered by those treaties, so, as a formal matter, there is no treaty override; and in fact the OECD, in the commentary on its model tax treaty, provides that states can deny the benefits of a tax treaty where arrangements have a main purpose of securing more favourable tax treatment in circumstances contrary to the object and purpose of that treaty.

My hon. Friend also asked whether the measure was compatible with EU law—he did so rather reluctantly, and I would be reluctant, too, on the matter of tax sovereignty. The diverted profits tax has been designed to comply fully with our obligations under EU law. It is aimed at structures that are clearly designed to erode the UK tax base. As such, it is an appropriate response to those who abuse EU law to divert profits from the UK. The safeguards built into the legislation provide taxpayers with a number of opportunities to demonstrate that they should not be subject to the diverted profits tax. Accordingly, we believe that this is a balanced and proportionate measure that tackles arrangements that are clearly designed for tax avoidance.

The hon. Members for Strangford, for South Antrim (Dr McCrea) and for Upper Bann (David Simpson) asked about the specific cut-off for the diverted profits tax. I can tell them that the rules do not apply to SMEs as defined by the EU. That includes companies with fewer than 250 employees, turnover of less than or equal to €50 million and a balance sheet size of €43 million. That is consistent with our transfer pricing legislation. There are also measures that restrict the diverted profits tax if there is not much UK business going on.

My hon. Friends the Members for Amber Valley and for Warrington South (David Mowat) asked about the Channel Islands and the Isle of Man. Of course, they will be aware that those territories are free to set their own rates. We in the UK will go through international forums in terms of influencing international tax jurisdictions, but the UK has a very clear and transparent tax policy-making process, as evidenced by this parliamentary debate. Tax is a national, sovereign matter, so individual tax jurisdictions are free to set their own tax policy. The diverted profits tax is designed to ensure that the UK’s tax base is not eroded by that.

My hon. Friend the Member for Amber Valley asked whether the assessment and collection processes will really work and whether they are fair. For example, if HMRC gets a notice from a big company saying that it might be within the scope, how can it issue an initial charge notice in 30 days? Where would the information come from and so on? I can tell him that the notification of potential liability to diverted profits tax must be made within three months of the end of the company’s accounting period. The Government are still consulting on the detail of the notification requirement and would welcome comments on the drafting. However, it is likely that not all notifications will result in the issue of a preliminary notice. The preliminary notice does not create a charge, but merely warns that a charging notice may be issued and sets out estimated figures that would be included. Following the issue of the preliminary notice, the company would have 30 days to correct any factual inaccuracies in it. That would include any errors in figures on which an assumption in the notice is based.

My hon. Friend the Member for Amber Valley and the hon. Member for Strangford asked whether the provisions were drawn too broadly, such that they might catch not only the abusive structures targeted but a whole load of other, unintended taxpayers. The Government are of course open to suggestions on how the drafting of the legislation could be clarified without undermining its effectiveness. However, the calculation of the charge follows well established transfer pricing principles. Those principles are widely understood and routinely applied by businesses in pricing intra-group transactions. The only difference is that where the contrived features set out in the legislation are present, the diverted profits tax will have to be paid earlier than in a normal transfer pricing dispute.

[Ian Swales]

I thank the Minister for giving way again; she is being very generous. She talked about the notification process and so on. Is she happy with our knowledge of legal entities and the fact that many of them will be outside the UK? Will HMRC be able to cope with that process?

[Andrea Leadsom]

The hon. Gentleman will be aware that this Government have significantly increased the resources available to HMRC for this purpose, so yes, we are confident we will be able to manage this process.

There were a number of other questions, which I fear I will not have time to deal with now, about interest payments being excluded. There is a limited exemption for certain arrangements that involve only loans, and separate work is going on to look at how to ensure fairness in the measures. That matter is not being excluded, but is being looked at separately.

Hon. Members raised the question of the wholesale diversion of profits to Luxembourg. The legislation targets profit diversion only where the profit has a clear link to the UK, as I think I made clear. It would not be appropriate for the legislation to go further than that and to bring into scope profits that originate from other territories. However, the Government are strongly supportive, as I said, of the BEPS process, which aims to prevent and address this international problem.

In conclusion, I reiterate that the whole purpose of the diverted profits tax is to create in the UK the most competitive environment in which to base and run a business, including low corporation taxes, but it is a requirement of this Government that companies wishing to do business in the UK should pay those taxes and should not seek to avoid paying them.