Finance (No. 2) Bill (HC Bill 193)

(4) See sections 96 and 97 for provision about the calculation of taxable diverted
profits for the purposes of a charging notice.

(5) A charging notice must—

(a) state the amount of the charge to diverted profits tax imposed by the
5notice;

(b) set out the basis on which the officer considers that section 80, 81 or 86
applies;

(c) state the accounting period of the company to which the notice applies;

(d) set out an explanation of the basis on which the charge is calculated,
10including—

(i) how the taxable diverted profits to which the charge relates
have been determined,

(ii) where relevant, details of the relevant alternative provision (see
section 82(5) or 88(7)) by reference to which those profits have
15been determined, and

(iii) how the amount of interest comprised in the charge under
section 79(2)(b) has been calculated;

(e) state who is liable to pay the diverted profits tax;

(f) state when the tax is due and payable;

(g) 20explain how interest is applied in accordance with section 101 of FA
2009 (late payment interest on sums due to HMRC) if the diverted
profits tax is not paid, the period for which interest is charged and the
rate at which it is charged.

(6) Where a charging notice is issued to a company, the officer must give a copy of
25the notice—

(a) if the notice is issued by reason of section 81 applying, to UKPE, and

(b) if the notice is issued by reason of section 86 applying, to the avoided
PE.

96 Section 80 or 81 cases: estimating profits for preliminary and charging notices

(1) 30Where taxable diverted profits arising to a company in an accounting period
fall to be determined under section 84 or 85, for the purposes of issuing a
preliminary notice under section 93 or a charging notice under section 95 the
taxable diverted profits to be specified in the notice, in relation to the material
provision in question, are determined in accordance with this section.

(2) 35The taxable diverted profits are such amount (if any) as the designated HMRC
officer issuing the notice determines, on the basis of the best estimate that can
reasonably be made at that time, to be the amount calculated in accordance
with sections 84 or 85 (as the case may be).

But this is subject to subsections (4) to (6).

(3) 40For the purposes of this section, “the inflated expenses condition” is met if—

(a) the material provision results in expenses of the company for which a
deduction has been taken into account by the company in computing—

(i) in a case where section 80 applies, its liability for corporation tax
for the accounting period, and

(ii) 45in a case where section 81 applies, its chargeable profits
attributable (in accordance with sections 20 to 32 of CTA 2009)
to UKPE,

(b) the expenses result, or a part of the expenses results, in the effective tax
mismatch outcome mentioned in section 80(1)(d), and

(c) in consequence of paragraphs (a) and (b), the designated HMRC officer
issuing the notice considers that the relevant expenses might be greater
5than they would have been if they had resulted from provision made or
imposed as between independent persons dealing at arm’s length.

(4) Subsection (5) applies where the designated HMRC officer issuing the notice
considers that—

(a) the inflated expenses condition is met, and

(b) 10it is reasonable to assume that section 84 or 85(4) applies.

(5) Where this subsection applies, the best estimate made by the officer in
accordance with subsection (2) is to be made on the assumption that—

(a) so much of the deduction mentioned in subsection (3)(a) as relates to
the relevant expenses is reduced by 30%, and

(b) 15in relation to the relevant expenses, Part 4 of TIOPA 2010 (transfer
pricing) is ignored.

(6) But—

(a) if the deduction for the expenses taken into account by the company in
computing its liability for corporation tax takes account of an
20adjustment required by Part 4 of TIOPA 2010 (transfer pricing) which
is reflected in the company’s company tax return prior to the issue of
the charging notice, and

(b) as a result that deduction is less than it would otherwise have been,

the reduction required by subsection (5)(a) is reduced (but not below nil) to
25take account of that adjustment.

(7) For the purposes of this section, sections 83(3) and 84(2)(c) have effect as if (in
each case) the words “before the end of the review period” were omitted.

(8) The Treasury may by regulations, made by statutory instrument, substitute a
different percentage for the percentage for the time being specified in
30subsection (5)(a).

(9) Regulations under this section are subject to annulment in pursuance of a
resolution of the House of Commons.

(10) In this section—

• “the material provision” has the same meaning as in section 80;

• 35“the relevant expenses” means so much of the expenses mentioned in
  subsection (3)(a) as result in the effective tax mismatch outcome as
  mentioned in subsection (3)(b).

97 Section 86 cases: estimating profits for preliminary and charging notices

(1) Where taxable diverted profits arising to the foreign company in an accounting
40period fall to be determined under section 89, 90 or 91, for the purposes of
issuing a preliminary notice under section 93 or a charging notice under section
95 the taxable diverted profits to be specified in the notice are determined
instead in accordance with this section.

(2) The taxable diverted profits are such amount as the designated HMRC officer
45issuing the notice determines, on the basis of the best estimate that can

reasonably be made at that time, to be the amount calculated in accordance
with section 89, 90 or 91 (as the case may be).

But this is subject to subsections (4) and (5).

(3) For the purposes of subsection (4), “the inflated expenses condition” is met if—

(a) 5the mismatch condition is met,

(b) the material provision results in expenses of the foreign company for
which (ignoring Part 4 of TIOPA 2010 (transfer pricing)) a deduction for
allowable expenses would be allowed in computing the notional PE
profits of the foreign company for the accounting period,

(c) 10the expenses result, or a part of the expenses results, in the effective tax
mismatch outcome mentioned in section 86(2)(c), and

(d) in consequence of paragraphs (a) to (c), the designated HMRC officer
issuing the notice considers that the relevant expenses might be greater
than they would have been if they had resulted from provision made or
15imposed as between independent persons dealing at arm’s length.

(4) Subsection (5) applies where the designated HMRC officer issuing the notice
considers that—

(a) the inflated expenses condition is met, and

(b) it is reasonable to assume that section 90 or 91(4) applies.

(5) 20Where this subsection applies, the best estimate made by the officer in
accordance with subsection (2) is to be made on the assumption that—

(a) so much of the deduction mentioned in subsection (3)(b) as relates to
the relevant expenses is reduced by 30%, and

(b) in relation to the relevant expenses, Part 4 of TIOPA 2010 (transfer
25pricing) is ignored.

(6) The Treasury may by regulations, made by statutory instrument, substitute a
different percentage for the percentage for the time being specified in
subsection (5)(a).

(7) Regulations under this section are subject to annulment in pursuance of a
30resolution of the House of Commons.

(8) In this section—

(a) “the relevant expenses” means so much of the expenses mentioned in
subsection (3)(b) as result in the effective tax mismatch outcome as
mentioned in section 86(2)(c), and

(b) 35“the foreign company”, “the material provision” and “the mismatch
condition” have the same meaning as in section 86.

Payment and recovery of tax

98 Payment of tax

(1) This section applies where a charging notice is issued to a company.

(2) 40Diverted profits tax charged by the notice must be paid within 30 days after the
day the notice is issued.

(3) The company is liable to pay the tax.

(4) The payment of the tax may not be postponed on any grounds, and so the
diverted profits tax charged by the charging notice remains due and payable

despite any review being conducted under section 101 or any appeal in respect
of the notice.

(5) In Schedule 16—

(a) Part 1 contains provision treating a liability of a non-UK resident
5company to pay diverted profits tax as if it were also a liability of its UK
representative;

(b) Part 2 contains provision enabling unpaid diverted profits tax due from
a non-UK resident company to be recovered from a related company.

99 Diverted profits tax ignored for tax purposes

(1) 10In calculating income, profits or losses for any tax purpose—

(a) no deduction, or other relief, is allowed in respect of diverted profits
tax, and

(b) no account is to be taken of any amount which is paid (directly or
indirectly) by a person for the purposes of meeting or reimbursing the
15cost of diverted profits tax.

(2) An amount paid as mentioned in subsection (1)(b) is not to be regarded for the
purposes of the Corporation Tax Acts as a distribution (within the meaning of
CTA 2010).

100 Credit for UK or foreign tax on same profits

(1) 20Subsection (2) applies where a company has paid—

(a) corporation tax, or

(b) a tax under the law of a territory outside the United Kingdom which
corresponds to corporation tax,

which is calculated by reference to profits of the company (“the taxed profits”).

(2) 25Such credit as is just and reasonable is allowed in respect of that tax against any
liability which either—

(a) that company has to diverted profits tax in respect of the taxed profits,
or

(b) another company has to diverted profits tax in respect of taxable
30diverted profits arising to that other company which are calculated by
reference to amounts which also constitute all or part of the taxed
profits.

(3) Subsection (4) applies where a company has paid—

(a) the CFC charge within the meaning of Part 9A of TIOPA 2010
35(controlled foreign companies) (see section 371VA), or

(b) a tax under the law of a territory outside the United Kingdom (by
whatever name known) which is similar to the CFC charge,

which is calculated by reference to profits of another company (“the CFC
profits”).

(4) 40Such credit as is just and reasonable is allowed in respect of that charge or tax
against any liability which a company has to diverted profits tax in respect of
taxable diverted profits arising to that other company which are calculated by
reference to amounts which also constitute all or part of the CFC profits.

(5) But nothing in this section allows a credit, against a liability to diverted profits
45tax, for an amount of tax or charge which was paid after the end of—

(a) the review period in respect of the charging notice which imposed the
charge to diverted profits tax, or

(b) where the charge to diverted profits tax was imposed by a
supplementary charging notice, the review period within which that
5notice was issued.

(6) For the purposes of subsection (1), any withholding tax paid on payments
made to a person is (unless it is refunded) to be treated—

(a) as tax within paragraph (a) or (b) of that subsection, and

(b) as paid by that person (and not the person making the payment).

(7) 10For the purposes of subsection (6), an amount of withholding tax paid on
payments made to a person is refunded if and to the extent that—

(a) any repayment of tax, or any payment in respect of a credit for tax, is
made to any person, and

(b) that repayment or payment is directly or indirectly in respect of the
15whole or part of the amount of that withholding tax.

Review and appeals

101 HMRC review of charging notice

(1) Where a charging notice is issued to a company for an accounting period, a
designated HMRC officer, within the review period—

(a) 20must carry out a review of the amount of diverted profits tax charged
on the company for the accounting period, and

(b) may carry out more than one such review.

(2) Subject to subsection (13), “the review period” means the period of 12 months
beginning immediately after the period of 30 days mentioned in section 98(2).

(3) 25Subsection (4) applies if—

(a) the company has paid (in full) the amount of diverted profits tax
charged by the charging notice, and

(b) the officer is satisfied that the total amount of diverted profits tax
charged on the company for that period is excessive having regard to
30sections 83, 84, 85, 89, 90 and 91 (calculation of taxable diverted profits).

(4) The officer may, during the review period, issue to the company an amending
notice which amends the charging notice so as to—

(a) reduce the amount of taxable diverted profits to which the notice
relates, and

(b) 35accordingly, reduce the charge to diverted profits tax imposed on the
company in respect of the accounting period.

(5) More than one amending notice may be issued to the company in respect of the
charging notice.

(6) Where an amending notice is issued, any tax overpaid must be repaid.

(7) 40Subsection (8) applies if a designated HMRC officer is satisfied that the total
amount of diverted profits tax charged on the company for the accounting
period is insufficient having regard to sections 83, 84, 85, 89, 90 and 91
(calculation of taxable diverted profits).

(8) The officer may, during the review period, issue a notice (a “supplementary
charging notice”) to the company imposing an additional charge to diverted
profits tax on the company in respect of the accounting period on taxable
diverted profits which—

(a) 5arise to the company for that period, and

(b) are not already the subject of a charge to diverted profits tax.

(9) Only one supplementary charging notice may be issued to the company in
respect of a charging notice.

(10) No supplementary charging notice may be issued during the last 30 days of the
10review period.

(11) Subsections (3) to (6) (amending notices) apply in relation to a supplementary
charging notice as they apply to the charging notice.

(12) Section 95(5) (content of charging notice) and section 98 (payment of tax) apply
in relation to a supplementary charging notice as they apply in relation to a
15charging notice.

(13) If either of the following events occurs before the end of the period of 12
months referred to in subsection (2), the review period ends at the time of that
event.

The events are—

• 20that following the issuing of a supplementary charging notice, the
  company notifies HMRC that it is terminating the review period;

• that a designated HMRC officer and the company agree (in writing)
  that the review period is to terminate.

(14) When determining on a review whether the total amount of taxable diverted
25profits charged on the company for an accounting period is excessive or
insufficient—

(a) the designated HMRC officer must not take any account of section 96
or (as the case may be) section 97 (which apply only for the purposes of
the officer estimating the taxable diverted profits for the purposes of
30issuing a preliminary notice or charging notice), and

(b) nothing in section 94 applies to restrict the representations which the
officer may consider.

(15) Where a supplementary charging notice or an amending notice is issued to a
company, the officer must give a copy of the notice—

(a) 35if the charging notice was issued by reason of section 81 applying, to
UKPE, and

(b) if the charging notice was issued by reason of section 86 applying, to the
avoided PE.

102 Appeal against charging notice or supplementary charging notice

(1) 40A company to which a charging notice or a supplementary charging notice is
issued may appeal against the notice.

(2) Notice of an appeal must be given to HMRC, in writing, within 30 days after
the end of the review period (see section 101(2) and (13)).

(3) The notice of appeal must specify the grounds of appeal.

(4) For the purposes of an appeal, sections 96 and 97 (which apply only for the
purposes of the officer estimating the taxable diverted profits for the purposes
of issuing a preliminary notice or charging notice) are to be ignored when
determining whether the taxable diverted profits in respect of which a charge
5is imposed have been correctly calculated.

(5) On an appeal under this section the Tribunal may—

(a) confirm the charging notice or supplementary charging notice to which
the appeal relates,

(b) amend that charging notice or supplementary charging notice, or

(c) 10cancel that charging notice or supplementary charging notice.

(6) For the purposes of Part 5 of TMA 1970 (appeals etc), an appeal under this
section is to be treated as if it were an appeal under the Taxes Acts (within the
meaning of that Act), and for that purpose references in that Part to an
assessment include a charging notice or supplementary charging notice under
15this Part.

(7) Subsection (6) is subject to section 98(4) (no postponement of payment of tax
pending appeal etc).

Administration of tax

103 Responsibility for collection and management

20The Commissioners for Her Majesty’s Revenue and Customs are responsible
for the collection and management of diverted profits tax.

104 Penalties etc

(1) Schedule 56 to FA 2009 (penalty for failure to make payments on time) is
amended as follows.

(2) 25In the Table at the end of paragraph 1, after item 6ZA insert—

(3) In paragraph 3 (amount of penalty: occasional amounts and amounts in respect
of periods of 6 months or more), after sub-paragraph (1)(a) insert—

“(aa) 35a payment of tax falling within item 6ZB in the Table,”.

(4) Schedule 41 to FA 2008 (penalties: failure to notify etc) is amended as follows.

(5) In the Table in paragraph 1, after the entry for corporation tax insert—

(6) 5In paragraph 7 (meaning of “potential lost revenue”), after sub-paragraph (4)
insert—

“(4A) In the case of a relevant obligation relating to diverted profits tax, the
potential lost revenue is the amount of diverted profits tax for which
P would be liable at the end of the period of 6 months beginning
10immediately after the accounting period assuming—

(a) a charge to diverted profits tax had been imposed on P on the
taxable diverted profits arising to P for the accounting period,
and

(b) that tax was required to be paid before the end of that period
15of 6 months.”

105 Information and inspection powers etc

(1) In Schedule 23 to FA 2011 (data-gathering powers), in paragraph 45(1) (taxes
to which powers apply), after paragraph (c) insert—

“(ca) diverted profits tax,”.

(2) 20In Schedule 36 to FA 2008 (information and inspection powers), in paragraph
63(1) (taxes to which powers apply), after paragraph (c) insert—

“(ca) diverted profits tax,”.

Interpretation

106 “The participation condition”

(1) 25This section applies for the purposes of sections 80 and 86(2).

(2) In this section “the first party” and “the second party” mean—

(a) where this section applies for the purposes of section 80, C and P
(within the meaning of section 80) respectively, and

(b) where this section applies for the purposes of section 86(2), the foreign
30company and A (within the meaning of section 86) respectively.

(3) The participation condition is met in relation to the first party and the second
party (“the relevant parties”) if—

(a) condition A is met in relation to the material provision so far as the
material provision is provision relating to financing arrangements, and

(b) 35condition B is met in relation to the material provision so far as the
material provision is not provision relating to financing arrangements.

(4) Condition A is that, at the time of the making or imposition of the material
provision or within the period of 6 months beginning with the day on which
the material provision was made or imposed—

(a) 40one of the relevant parties was directly or indirectly participating in the
management, control or capital of the other, or

(b) the same person or persons was or were directly or indirectly
participating in the management, control or capital of each of the
relevant parties.

(5) Condition B is that, at the time of the making or imposition of the material
5provision—

(a) one of the relevant parties was directly or indirectly participating in the
management, control or capital of the other, or

(b) the same person or persons was or were directly or indirectly
participating in the management, control or capital of each of the
10relevant parties.

(6) In this section “financing arrangements” means arrangements made for
providing or guaranteeing, or otherwise in connection with, any debt, capital
or other form of finance.

(7) For the purposes of this section—

(a) 15section 157(2) of TIOPA 2010 (“direct participation”) applies, and

(b) sections 158 to 163 of that Act (“indirect participation” in management,
control or capital of a person) apply as if in those sections—

(i) references to section 148(2) of that Act included references to
subsection (4) of this section,

(ii) 20references to paragraph (a) or (b) of section 148(2) of that Act
included (respectively) references to paragraph (a) or (b) of
subsection (4) of this section,

(iii) references to section 148(3) of that Act included references to
subsection (5) of this section, and

(iv) 25references to paragraph (a) or (b) of section 148(3) of that Act
included (respectively) references to paragraph (a) or (b) of
subsection (5) of this section.

107 “Effective tax mismatch outcome”

(1) This section applies for the purposes of sections 80 and 86(2).

(2) 30In this section “the first party” and “the second party” mean—

(a) where this section applies for the purposes of section 80, C and P
(within the meaning of section 80) respectively, and

(b) where this section applies for the purposes of section 86(2), the foreign
company and A (within the meaning of section 86) respectively.

(3) 35The material provision results in an effective tax mismatch outcome as
between the first party and the second party for an accounting period of the
first party if—

(a) in that accounting period, in relation to a relevant tax, it results in one
or both of—

(i) 40expenses of the first party for which a deduction has been taken
into account in computing the amount of the relevant tax
payable by the first party, or

(ii) a reduction in the income of the first party which would
otherwise have been taken into account in computing the
45amount of a relevant tax payable by the first party,

(b) the resulting reduction in the amount of the relevant tax which is
payable by the first party exceeds the resulting increase in relevant

taxes payable by the second party for the corresponding accounting
period of the second party,

(c) the results described in paragraphs (a) and (b) are not exempted by
subsection (6), and

(d) 5the second party does not meet the 80% payment test.

(4) In this Part, references to “the tax reduction” are to the amount of the excess
mentioned in subsection (3)(b).

(5) It does not matter whether the tax reduction results from the application of
different rates of tax, the operation of a relief, the exclusion of any amount from
10a charge to tax, or otherwise.

(6) The results described in subsection (3)(a) and (b) are exempted if they arise
solely by reason of—

(a) contributions paid by an employer under a registered pension scheme,
or overseas pension scheme, in respect of any individual,

(b) 15a payment to a charity,

(c) a payment to a person who, on the ground of sovereign immunity,
cannot be liable for any relevant tax, or

(d) a payment to an offshore fund or authorised investment fund—

(i) which meets the genuine diversity of ownership condition
20(whether or not a clearance has been given to that effect), or

(ii) at least 75% of the investors in which are, throughout the
accounting period, registered pension schemes, overseas
pension schemes, charities or persons who cannot be liable for
any relevant tax on the ground of sovereign immunity.

(7) 25“The 80% payment test” is met by the second party if the resulting increase in
relevant taxes payable by the second party as mentioned in subsection (3)(b) is
at least 80% of the amount of the resulting reduction in the amount of the
relevant tax payable by the first party as mentioned in subsection (3)(b).

(8) In this section—

• 30“authorised investment fund” means—

  (a)

  an open-ended investment company within the meaning of
  section 613 of CTA 2010, or

  (b)

  an authorised unit trust within the meaning of section 616 of
  that Act;

• 35“employer” has the same meaning as in Part 4 of FA 2004 (see section
  279(1) of that Act);

• “genuine diversity of ownership condition” means—

  (a)

  in the case of an offshore fund, the genuine diversity of
  ownership condition in regulation 75 of the Offshore Funds
  40(Tax) Regulations 2009 (S.I. 2009/3001S.I. 2009/3001), and

  (b)

  in the case of an authorised investment fund, the genuine
  diversity of ownership condition in regulation 9A of the
  Authorised Investment Fund (Tax) Regulations 2006 (S.I. 2006/
  964);

• 45“offshore fund” has the same meaning as in section 354 of TIOPA 2010
  (see section 355 of that Act);

• “overseas pension scheme” has the same meaning as in Part 4 of FA 2004
  (see section 150(7) of that Act);

Finance (No. 2) BillPage 110

• “registered pension scheme” has the same meaning as in that Part (see
  section 150(2) of that Act);

• “relevant tax” means—

  (a)

  corporation tax on income,

  (b)

  5a sum chargeable under section 330(1) of CTA 2010
  (supplementary charge in respect of ring fence trades) as if it
  were an amount of corporation tax,

  (c)

  income tax, or

  (d)

  any non-UK tax on income.

(9) 10See section 108 for further provision about the determination of the tax
reduction and the 80% payment test.

108 Provision supplementing section 107

(1) For the purposes of section 107(3)(b) and (7), the resulting reduction in the first
party’s liability to a relevant tax for an accounting period is—

15

(2) 25For the purposes of section 107(3)(b) and (7), the resulting increase in relevant
taxes payable by the second party for the corresponding accounting period is
any increase in the total amount of relevant taxes that would fall to be paid by
the second party (and not refunded) assuming that—

(a) the second party’s income for that period, in consequence of the
30material provision were an amount equal to A,

(b) account were taken of any deduction or relief (other than any
qualifying deduction or qualifying loss relief) taken into account by the
second party in determining its actual liability to any relevant tax in
consequence of the material provision, and

(c) 35all further reasonable steps were taken—

(i) under the law of any part of the United Kingdom or any country
or territory outside the United Kingdom, and

(ii) under double taxation arrangements made in relation to any
country or territory,

40to minimise the amount of tax which would fall to be paid by the
second party in the country or territory in question (other than steps to
secure the benefit of any qualifying deduction or qualifying loss relief).

(3) The steps mentioned in subsection (2)(c) include—

(a) claiming, or otherwise securing the benefit of, reliefs, deductions,
45reductions or allowances, and

(b) making elections for tax purposes.

(4) For the purposes of this section, any withholding tax which falls to be paid on
payments made to the second party is (unless it is refunded) to be treated as tax
which falls to be paid by the second party (and not the person making the
payment).

(5) 5For the purposes of this section, an amount of tax payable by the second party
is refunded if and to the extent that—

(a) any repayment of tax, or any payment in respect of a credit for tax, is
made to any person, and

(b) that repayment or payment is directly or indirectly in respect of the
10whole or part of the amount of tax payable by the second party,

but an amount refunded is to be ignored if and to the extent that it results from
qualifying loss relief obtained by the second party.

(6) Where the second party is a partnership, in section 107 and this section—

(a) references to the second party’s liability to any tax (however expressed)
15include a reference to the liabilities of all members of the partnership to
the tax,

(b) references to any tax being payable by the second party (however
expressed) include a reference to tax being payable by any member of
the partnership, and

(c) 20references to loss relief obtained by the second party include a reference
to loss relief obtained by any member of the partnership,

and subsection (4) applies to any member of the partnership as it applies to the
second party.

(7) In this section—

• 25“the first party” and “the second party” have the same meaning as in
  section 107;

• “qualifying deduction” means a deduction which—

  (a)

  is made in respect of actual expenditure of the second party,

  (b)

  does not arise directly from the making or imposition of the
  30material provision,

  (c)

  is of a kind for which the first party would have obtained a
  deduction in calculating its liability to any relevant tax had it
  incurred the expenditure in respect of which the deduction is
  given, and

  (d)

  35does not exceed the amount of the deduction that the first party
  would have so obtained;

• “qualifying loss relief” means—

  (a)

  any means by which a loss might be used for corporation tax
  purposes to reduce the amount in respect of which the second
  40party is liable to tax, and

  (b)

  in the case of a non-UK resident company, any corresponding
  means by which a loss corresponding to a relevant CT loss
  might be used for the purposes of a non-UK tax corresponding
  to corporation tax to reduce the amount in respect of which the
  45second party is liable to tax,

  (and in paragraph (b) “relevant CT loss” means a loss which might be
  used as mentioned in paragraph (a));

• “relevant tax” has the same meaning as in section 107.

109 “Excepted loan relationship outcome”

(1) This section applies for the purposes of sections 80 and 86(2).

(2) The effective tax mismatch outcome is an “excepted loan relationship
outcome” if the result described in section 107(3)(a) arises wholly from—

(a) 5anything that, if a company within the charge to corporation tax were
party to it, would produce debits or credits under Part 5 of CTA 2009
(loan relationships and deemed loan relationships) (“a loan
relationship”), or

(b) a loan relationship and a relevant contract (within the meaning of Part
107 of that Act (derivative contracts)) taken together, where the relevant
contract is entered into entirely as a hedge of risk in connection with the
loan relationship.

110 “The insufficient economic substance condition”

(1) This section applies for the purposes of sections 80 and 86(2).

(2) 15In this section “the first party” and “the second party” mean—

(a) where this section applies for the purposes of section 80, C and P
(within the meaning of section 80) respectively, and

(b) where this section applies for the purposes of section 86(2), the foreign
company and A (within the meaning of section 86) respectively.

(3) 20The insufficient economic substance condition is met if one or more of
subsections (4), (5) and (6) apply.

(4) This subsection applies where—

(a) the effective tax mismatch outcome is referable to a single transaction,
and

(b) 25it is reasonable to assume that the transaction was designed to secure
the tax reduction,

unless, at the time of the making or imposition of the material provision, it was
reasonable to assume that, for the first party and the second party (taken
together) and taking account of all accounting periods for which the
30transaction was to have effect, the non-tax benefits referable to the transaction
would exceed the financial benefit of the tax reduction.

(5) This subsection applies where—

(a) the effective tax mismatch outcome is referable to any one or more of
the transactions in a series of transactions, and

(b) 35it is reasonable to assume that the transaction was, or the transactions
were, designed to secure the tax reduction,

unless, at the time of the making or imposition of the material provision, it was
reasonable to assume that, for the first party and the second party (taken
together) and taking account of all accounting periods for which the
40transaction or series was to have effect, the non-tax benefits referable to the
transaction or transactions would exceed the financial benefits of the tax
reduction.

(6) This subsection applies where—

(a) a person is a party to the transaction, or to any one or more of the
45transactions in the series of transactions, to which section 80(1)(b) or
section 86(2)(a) refers, and

(b) it is reasonable to assume that the person’s involvement in the
transaction or transactions was designed to secure the tax reduction,

unless one or both of the conditions in subsection (7) is or are met.

(7) Those conditions are—

(a) 5that, at the time of the making or imposition of the material provision,
it was reasonable to assume that, for the first party and the second party
(taken together) and taking account of all accounting periods for which
the transaction or series was to have effect, the non-tax benefits
referable to the contribution made to the transaction or series by that
10person, in terms of the functions or activities that that person’s staff
perform, would exceed the financial benefit of the tax reduction;

(b) that, in the accounting period—

(i) the income attributable to the ongoing functions or activities of
that person’s staff in terms of their contribution to the
15transaction or transactions (ignoring functions or activities
relating to the holding, maintaining or protecting of any asset
from which income attributable to the transaction or
transactions derives), exceeds

(ii) the other income attributable to the transaction or transactions.

(8) 20For the purposes of subsection (7) a person’s staff include—

(a) any director or other officer of the person,

(b) if the person is a partnership, any individual who is a member of the
partnership, and

(c) externally provided workers in relation to the person.

(9) 25For the purposes of subsections (4)(b), (5)(b) and (6)(b)—

(a) when determining whether it is reasonable to assume—

(i) that a transaction was, or transactions were, designed to secure
the tax reduction, or

(ii) that a person’s involvement in a transaction or transactions was
30designed to secure the tax reduction,

regard must be had to all the circumstances, including any liability for
any additional tax that arises directly or indirectly as a consequence of
the transaction or transactions, and

(b) a transaction or transactions, or a person’s involvement in a transaction
35or transactions, may be designed to secure the tax reduction despite it
or them also being designed to secure any commercial or other
objective.

(10) In this section—

• “externally provided worker” has the meaning given by section 1128 of
  40CTA 2009, but as if in that section for “company” (in each place) there
  were substituted “person”;

• “non-tax benefits” means financial benefits other than—

  (a)

  the financial benefit of the tax reduction, and

  (b)

  any other financial benefits which derive (directly or indirectly)
  45from the reduction, elimination, or delay of any liability of any
  person to pay any tax;

• “tax” includes non-UK tax.

111 “Transaction” and “series of transactions”

(1) In this Part “transaction” includes arrangements, understandings and mutual
practices (whether or not they are, or are intended to be, legally enforceable).

(2) References in this Part to a series of transactions include references to a number
5of transactions each entered into (whether or not one after the other) in
pursuance of, or in relation to, the same arrangement.

(3) A series of transactions is not prevented by reason only of one or more of the
matters mentioned in subsection (4) from being regarded for the purposes of
this Part as a series of transactions by means of which provision has been made
10or imposed as between any two persons.

(4) Those matters are—

(a) that there is no transaction in the series to which both those persons are
parties,

(b) that the parties to any arrangement in pursuance of which the
15transactions in the series are entered into do not include one or both of
those persons, and

(c) that there is one or more transactions in the series to which neither of
those persons is a party.

(5) In this section “arrangement” means any scheme or arrangement of any kind
20(whether or not it is, or is intended to be, legally enforceable).

112 Treatment of a person who is a member of a partnership

(1) This section applies where a person is a member of a partnership.

(2) Any references in this Part to the expenses, income or revenue of, or a
reduction in the income of, the person includes a reference to the person’s
25share of (as the case may be) the expenses, income or revenue of, or a reduction
in the income of, the partnership.

(3) For this purpose “the person’s share” of an amount is determined by
apportioning the amount between the partners on a just and reasonable basis.

113 “Accounting period” and “corresponding accounting period”

(1) 30In this Part references to an accounting period of a company are to an
accounting period of the company for the purposes of corporation tax.

(2) Subsection (3) applies where—

(a) a non-UK resident company (“FC”) is not within the charge to
corporation tax,

(b) 35a person, whether or not UK resident, is carrying on activity in the
United Kingdom in connection with supplies of services, goods or
other property made by FC in the course of a trade carried on by FC,
and

(c) it is reasonable to assume that any of the activity of that person or FC
40(or both) is designed so as to ensure that FC does not, as a result of that
person’s activity, carry on that trade in the United Kingdom for the
purposes of corporation tax (whether or not it is also designed to secure
any commercial or other objective).

(3) For the purposes of this Part, FC is assumed to have such accounting periods
for the purposes of corporation tax as it would have had if it had carried on a
trade in the United Kingdom through a permanent establishment in the United
Kingdom by reason of the activity of the person mentioned in subsection (2)(b).

(4) 5For the purposes of subsection (2)—

(a) the reference in that subsection to activity of the person includes any
limitation which has been imposed or agreed in respect of that activity;

(b) where FC is a member of a partnership—

(i) a trade carried on by the partnership is to be regarded as a trade
10carried on by FC, and

(ii) supplies made by the partnership in the course of that trade are
to be regarded as supplies made by FC in the course of that
trade.

(5) Where the designated HMRC officer has insufficient information to identify, in
15accordance with subsection (3), the accounting periods of FC, for the purposes
of this Part the officer is to determine those accounting periods to the best of
the officer’s information and belief.

(6) Where a company (“C1”) does not have an actual accounting period which
coincides with the accounting period of another company (“the relevant
20accounting period”) (whether by reason of having no accounting periods or
otherwise), in this Part—

(a) references to the corresponding accounting period of C1 in relation to
the relevant accounting period are to the notional accounting period of
C1 that would coincide with the relevant accounting period, and

(b) 25such apportionments as are just and reasonable are to be made to
determine the income or tax liability of C1 for that corresponding
accounting period.

114 Other defined terms in Part 3

(1) In this Part—

• 30“allowable expenses” means expenses of a kind in respect of which a
  deduction would be allowed for corporation tax purposes;

• “the avoided PE” has the same meaning as in section 86;

• “company” has the same meaning as in the Corporation Tax Acts (see
  section 1121 of CTA 2010);

• 35“connected” is to be read in accordance with sections 1122 and 1123 of
  CTA 2010;

• “designated HMRC officer” means an officer of Revenue and Customs
  who has been designated by the Commissioners for Her Majesty’s
  Revenue and Customs for the purposes of diverted profits tax;

• 40“HMRC” means Her Majesty’s Revenue and Customs;

• “non-UK resident” has the same meaning as in the Corporation Tax Acts
  (see section 1119 of CTA 2010);

• “non-UK tax” has the meaning given by section 187 of CTA 2010;

• “the notional PE profits” has the meaning given by section 88(5);

• 45“partnership” includes—

  (a)

  a limited liability partnership to which section 1273 of CTA 2009
  applies, and

  Finance (No. 2) BillPage 116

  (b)

  an entity established under the law of a territory outside the
  United Kingdom of a similar character to a partnership,

  and “member” of a partnership is to be read accordingly;

• “permanent establishment”, in relation to a company, has the meaning
  5given by Chapter 2 of Part 24 of CTA 2010 (and accordingly section
  1141(1) of that Act has effect, for the purposes of this Part, as if the
  reference to the Corporation Tax Acts included a reference to this Part);

• “small or medium-sized enterprise” means a small enterprise, or a
  medium-sized enterprise, within the meaning of section 172 of TIOPA
  102010;

• “the review period” has the meaning given by section 101;

• “the tax reduction” has the meaning given by section 107(4);

• “UK resident” has the same meaning as in the Corporation Tax Acts (see
  section 1119 of CTA 2010);

• 15“UKPE” has the same meaning as in section 81.

(2) For the purposes of this Part a tax may correspond to corporation tax even
though—

(a) it is chargeable under the law of a province, state or other part of a
country, or

(b) 20it is levied by or on behalf of a municipality or other local body.

Final provisions

115 Application of other enactments to diverted profits tax

(1) In section 206(3) of FA 2013 (taxes to which the general anti-abuse rule applies),
after paragraph (d) insert—

“(da) 25diverted profits tax,”.

(2) In paragraph 7 of Schedule 6 to FA 2010 (enactments to which definition of
“charity” in Part 1 of that Schedule applies) omit the “and” after paragraph (h)
and after paragraph (i) insert “, and

(j) diverted profits tax.”

(3) 30In section 1139 of CTA 2010 (definition of “tax advantage” for the purposes of
provisions of the Corporation Tax Acts which apply this section), in subsection
(2), omit the “or” at the end of paragraph (da) and after paragraph (e) insert “,
or

“(f) the avoidance or reduction of a charge to diverted profits tax.”

(4) 35In section 178 of FA 1989 (setting rates of interest), in subsection (2), omit the
“and” before paragraph (u) and after that paragraph insert “, and

(v) section 79 of FA 2015.”

(5) In section 1 of the Provisional Collection of Taxes Act 1968 (temporary
statutory effect of House of Commons resolutions affecting income tax,
40purchase tax or customs or excise duties), in subsection (1), after “the bank
levy,” insert “diverted profits tax,”.

116 Commencement and transitional provision

(1) This Part has effect in relation to accounting periods beginning on or after 1
April 2015.

(2) For the purposes of this Part, if an accounting period of a company begins
before and ends on or after 1 April 2015 (“the straddling period”)—

(a) so much of that accounting period as falls before 1 April 2015 and so
much of it as falls on or after that date are treated as separate
5accounting periods, and

(b) where it is necessary to apportion amounts for the straddling period to
the different parts of that period, that apportionment is to be made on
a just and reasonable basis.

(3) For the purposes of any accounting period which ends on or before 31 March
102016, section 92 has effect as if in subsection (2)(b) of that section the reference
to 3 months were a reference to 6 months.

(4) This Part does not apply in relation to any profits arising to a Lloyd’s corporate
member which are—

(a) mentioned in section 220(2) of FA 1994 (Lloyd’s underwriters:
15accounting period in which certain profits or losses arise), and

(b) declared in the calendar year 2015 or a later calendar year,

to the extent that those profits are referable, on a just and reasonable basis, to
times before 1 April 2015.

(5) In subsection (4) “Lloyd’s corporate member” means a body corporate which
20is a member of Lloyd’s and is or has been an underwriting member.

Part 4 Other provisions