UK Enacts 'Google Tax' in Pre-Election Finance Bill

The UK's Finance Act 2015 received Royal Assent on March 26, 2015, enacting a new 25% diverted profits tax (DPT) aimed at changing corporate behavior. The tax is set intentionally higher than the UK's 20% corporation tax rate. Counsel for multinationals should care because the DPT creates significant new risks for two common structures: foreign companies with substantial UK business activities structured to avoid a UK permanent establishment, and UK-based entities using payments to low-tax affiliates to reduce taxable profits.

The administrative process is particularly aggressive. HM Revenue & Customs (HMRC) can issue a "charging notice" based on an estimated assessment, and the company must pay the disputed tax within 30 days. Appeals are only possible after a one-year review period, creating a "pay first, appeal later" system with immediate cash-flow consequences. Companies must now assess whether their structures require them to notify HMRC of potential liability under the new regime. Given the law's subjective tests and its rapid passage before a general election, further guidance and legal challenges are anticipated.