In the global fight against corporation tax avoidance, the Diverted Profits Tax (DPT) has emerged as a powerful weapon for tax authorities—especially in the UK. Sometimes known as the “Google Tax,” this anti-avoidance measure is designed to tackle contrived arrangements by multinational companies that artificially shift profits out of higher-tax jurisdictions. Here is an in-depth look at Diverted Profits Tax, how it works, who it affects, and why it matters in the UK.
What Is Diverted Profits Tax?
Diverted Profits Tax is a special tax introduced to deter multinational companies from using aggressive tax planning strategies to divert profits away from countries where economic activities actually take place. The UK introduced this tax in 2015, targeting large multinational enterprises with global revenues exceeding a specific threshold.
Unlike, UK Corporation Tax which applies to declared profits, DPT aims to tax profits that should have been reported in the UK but were instead diverted through artificial arrangements elsewhere.
Why Was Diverted Profits Tax Introduced?
The introduction of Diverted Profits Tax came as a response to increasing public concern over the low effective tax rates paid by major multinationals like Google, Amazon, and Apple. Despite operating extensively in the UK, these companies often reported minimal taxable profits there, thanks to complex tax structures involving offshore entities, royalty payments, and transfer pricing mechanisms.
Governments found that traditional transfer pricing rules were not sufficient to address these practices. DPT was introduced as a targeted, aggressive response to realign taxation with economic substance.
How Diverted Profits Tax Works.
The Diverted Profits Tax works by imposing a higher tax rate on profits that are deemed to have been artificially diverted. In the UK, the DPT rate is 31%, compared to the regular corporation tax rate of 25% (as of 2025). This differential is intentional—it’s designed to penalize companies for engaging in tax avoidance and to encourage them to restructure their arrangements to be more transparent and compliant.
Key Triggers for DPT in the UK Include:
- A UK entity that avoids a taxable presence through a “permanent establishment” avoidance arrangement.
- Transactions that lack economic substance and have a main purpose of reducing UK tax.
- Lack of a meaningful connection between profits and genuine economic activity.
Who Is Affected by Diverted Profits Tax?
The Diverted Profits Tax predominantly affects large multinational enterprises that operate across borders and engage in sophisticated tax planning. However, the implications can trickle down to other companies in the supply chain or those entering into joint ventures or licensing agreements with multinationals.
It’s important to note that DPT is not a general anti-avoidance rule for all businesses—it is aimed specifically at aggressive tax avoidance schemes involving artificial arrangements.
Affected companies are required to notify HMRC if they believe they may be within the scope of DPT, and they are subject to a tight timetable for response and payment.
Compliance and Reporting Requirements for Diverted Profits Tax
One of the more challenging aspects of Diverted Profits Tax is the compliance burden it places on affected companies. In the UK, businesses must:
Notify HMRC within three months of the end of the accounting period if they believe DPT may apply.
After notification, HMRC may issue a DPT charging notice.
Companies then have 30 days to pay the tax upfront—even if they plan to challenge it. There is a separate review and dispute resolution process outside of regular tax appeals, which can take up to 15 months. These procedures make DPT not only a financial issue but a significant compliance risk that companies must proactively manage.
The Effectiveness of Diverted Profits Tax
Since its introduction, the Diverted Profits Tax has raised billions in additional tax revenue and led to significant behavioural changes among multinational companies. Many businesses have restructured their tax arrangements to avoid falling within the scope of DPT, thereby increasing their taxable presence in the UK.
HMRC has reported that DPT has been particularly effective in securing earlier and larger settlements from companies that previously engaged in aggressive tax planning. In many cases, the mere threat of DPT has been enough to drive compliance.
Real-World Example: How Profits Can Be Diverted
Consider a multinational technology company, TechGlobal Ltd, headquartered in the US but operating in the UK through a subsidiary, TechUK Ltd.
Instead of selling its products directly through TechUK Ltd, the company structures things so that:
- TechUK Ltd only performs marketing and customer support.
- Actual sales contracts are signed with an Irish subsidiary, where corporate tax is significantly lower.
- TechUK Ltd receives a small commission for its services, while most of the profit is declared in Ireland.
Even though the economic activity (sales efforts, customer engagement) occurs in the UK, the profits are reported elsewhere reducing the company’s UK tax liability.
Under traditional tax rules, this might pass without challenge. But under DPT, HMRC can argue that:
- A permanent establishment was effectively created in the UK.
- The arrangement lacks economic substance and was primarily designed to avoid UK tax.
As a result, HMRC can impose Diverted Profits Tax at 31% on the profits that should have been taxed in the UK. In many cases, this threat alone has pushed companies to restructure and align profits more closely with local economic activity.
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Conclusion: Navigating the Risks of Diverted Profits Tax
The Diverted Profits Tax is more than just a punitive measure—it’s a signal to multinational companies that UK tax authorities are serious about closing the gap between profits and taxation. While it adds complexity and risk to international tax planning, it also rewards transparency, substance, and compliance.
Businesses operating across borders should assess their exposure to DPT and engage in proactive dialogue with HMRC to mitigate risks. In an era of heightened scrutiny and shifting tax norms, understanding and adapting to the rules of Diverted Profits Tax is not just advisable—it’s essential.
