A new UK government tax measure designed to prevent firms shuffling profits around to low-tax jurisdictions may not seem immediately relevant to wealth managers, but as a sign of how far countries are prepared to go after revenues, it is highly instructive about how far too much policy is now implemented.

A new UK government tax measure designed to prevent firms shuffling profits around to low-tax jurisdictions may not seem immediately relevant to wealth managers, but as a sign of how far countries are prepared to go after revenues, it is highly instructive about how far too much policy is now implemented.

In his annual autumn statement just under two weeks ago, UK finance minister (aka Chancellor of the Exchequer) George Osborne unveiled a raft of measures that will affect high net worth and ultra-high net worth individuals, particularly relating to property. (For more detail, see here). In the corporate space, one measure that has already got lawyers and accountants rubbing their eyes in bemusement is Osborne’s “diverted profits tax”. In a nutshell, the government will slap a 25 per cent tax on a firm where a foreign company "exploits the permanent establishment rules" or where a UK company or a foreign company with a UK-taxable presence creates a tax advantage by using transactions or entities that, the government says, "lack economic substance".

The measure has already provoked a chorus of concern that such a tax will be complicated, will be hard to enforce in practice, and arguably raise relatively little revenue. (It will arguably cost more to collect, when lawyers’ and accountants’ fees are totted up, than what is raised.) The measure is clearly political in intent: a run of stories about how certain firms, such as Google, Amazon and FedEx, have moved profits around to get the best possible deal in jurisdiction terms (such as going to Luxembourg) has caused predictable rage among policymakers and parts of the media. (Such firms are not doing anything illegal, it should be noted.)

As an example of industry reaction, take accountancy firm Moore Stephens, which described the DPT as a “disappointing and worrying development”. It argues that the tax’s rules are “subjective, draconian and out of step with UK tax treaties”.

The firm argues in a briefing note that recent detail released on the DPT shows it is designed to tackle two different situations. The first involves the Google-type situations, where a foreign company is making substantial sales in the UK, but which deliberately structures its UK activities so that it is not treated as trading through a UK permanent establishment. In the second targeted situation, a UK or foreign company with an acknowledged UK permanent establishment tries to reduce its UK taxable profits by means of transactions or entities that “lack economic substance”. This typically involves making payments to other group companies outside the UK in lower-tax jurisdictions. The DPT rules set out tests for both these situations to establish when a multinational’s structures might be caught.

Moore Stephens asks the question as to how does the UK aim to reconcile the new rules with its obligations under its wide network of double-tax treaties. In every treaty the UK agrees not to tax the business profits of a company resident in the other country, unless it has a permanent establishment in the UK. Yet these new rules say that where a foreign company has no UK PE, but certain conditions are met, the UK will tax the foreign company as if it does. “This appears to be in blatant contravention of the treaties and simply calling the new tax ‘DPT’ doesn’t overcome that,” Moore Stephens said.

The firm also notes that the DPT legislation is “littered” with a worrying number of references to “it is reasonable to assume”, saying such an expression is highly subjective and hard to test. The law is also draconian, Moore Stephens said, because companies must notify HM Revenue & Customs whether they consider that they fall under the new rules, on pain of penalty. If the tax authority decides to test that situation for itself, a company has only 30 days to object and it has limited grounds on which to do so. The tax that is charged is to be paid in full within 30 days, with no appeal. This seems extremely harsh.

“It is surprising and disappointing that the government has chosen to take unilateral action in this way when previously the UK has been a champion of the multilateral, consensual approach adopted by the G20 and the Organisation for Economic Co-operation and Development,” Moore Stephens continues. It argues that the areas that the new tax is designed to tackle have already been covered by the OECD’s Action Plan on Base Erosion and Profit Shifting, elements of which the government plans to introduce into legislation as early as 2017.

Finally, Moore Stephens notes, damningly, that the DPT is only forecast to raise £25 million ($39.2 million) in 2015-16 and that the government should have waited a short period for the OECD’s own recommendations to reach the light of day. But what Moore Stephens does not say – perhaps because it wants to avoid sounding cynical – is that Britain has to hold a general election by May next year, and one can be certain that issues such as big evil corporations not paying “their fair share” will be a common theme on the hustings. And Osborne will be able to claim that the government has "done something" to foil corporate finance officers.

What is so demoralising about such seat-of-the-pants rulemaking is that this is coming from what likes to be regarded as a pro-business government, rather than a more overtly socialist one. It seems that Osborne and his fellow Tories feel obliged to bring out unworkable and potentially costly, legislation for the sake of a few decent headlines. This has, one is afraid to say, an ingrained trait of the current finance minister and his colleagues, and anyone trying to imagine what might happen next in the wealth management space in the UK should bear that sobering fact in mind. The prospect of root-and-branch reform of corporate taxation, making it simpler and reducing the deadweight cost of tax compliance, seems as remote as ever.