The Questionable Legality of the Diverted Profits Tax Under Double Taxation Conventions and EU Law

This article considers the operation of the UK’s Diverted Profits Tax (DPT), and postulates as to whether or not the tax is compatible with both the UK’s obligations under its Double Tax Conventions (DTCs) with other states, and with European Union (EU) Law. In both instances, analogous case law regarding the introduction of Controlled Foreign Corporation rules is considered. This article considers whether or not the DPT constitutes a unilateral extension of the UK’s jurisdiction to tax, in breach of the jurisdiction provisions of DTCs. In doing so, it considers whether or not the DPT is sufficiently similar to Corporation Tax such as to fall within the ambit of the UK’s DTCs. This article further considers whether or not the DPT is compatible with freedom of establishment and free movement of capital provided for by the EU Treaties. It considers the DPT in light of a string of EU jurisprudence that has consistently held that anti-avoidance measures in domestic tax laws are only compatible with EU law insofar as they apply to wholly artificial arrangements. This article concludes that in both instances, the legality of the DPT is highly questionable.