Yesterday at the OUCBT conference on Diverted Profits tax (‘DPT’), the ‘respondents’ on behalf of the government (Philip Baker QC and Mike Williams of the Treasury) were quick to point out that the DPT was aimed at contrived, artificial arrangements. If this were the case, I asked Mike Williams, then would the GAAR apply to such arrangements already, and if it does not, then why not amend the GAAR? He responded that the two instruments have separate intended uses (fine, although I’m really not sure that they do) and secondly that he wasn’t sure that the GAAR would be able to catch such arrangements in any case. This latter response is crucial. The Treasury is not sure that the GAAR would apply to the contrived arrangements at which the DPT is directed. Should it not find out?
This underlines the real motivation behind the DPT-if the Treasury and HMRC were really concerned with countering contrived arrangements, then surely they would try out the GAAR first, which appears as yet unused 1 and a half years after its introduction. The real motivation must lie elsewhere and I posit that the DPT is driven by politics.
Last year, Labour introduced the idea of a ‘Mansion Tax’ which drew serious traction with focus groups. Such a tax would ensure that the wealthiest ‘pay their fair share’. Eager not to be tarred with the ‘party of the rich’ brush, the Conservatives were in need of a tax reform aimed at the wealthiest which would ensure that they also ‘pay their fair share’. Due to obvious constraints, the Tories could not direct such a reform at housing, and chose large multinational companies instead as the target. Hence, the Conservatives scrambled for the DPT. In other words, the DPT is a reaction against Labour’s wealth tax. The rush to introduce the tax in the next Finance Bill further supports this, as this change could surely wait until after BEPS, but this would be long after the General Election.
What this episode tells us about politics more generally is quite worrying. It appears more and more today that politicians are saying simply what we want to hear. But as history has surely taught us, danger lies in reactionary legislating, as directed by focus groups and dictated by populism.