Proposed reforms of the UK’s transfer pricing, permanent establishment and Diverted Profits Tax (DPT) rules

Following a consultation period in the summer of 2023, HMRC has now published a summary of responses.

The proposed reforms to the UK’s transfer pricing, permanent establishment and the diverted profits tax (“DPT”) legislation will more closely align the UK’s rules with international standards (for example, the OECD model tax convention). There is, however, scope to retain some unique features to accommodate the UK’s significant financial sector whilst reducing the compliance burden in lower-risk areas. On the whole, therefore, the proposals should be welcomed by taxpayers.

Our key takeaways:

Transfer pricing

• No radical changes were proposed, but respondents encouraged simplifying the legislation in certain areas and additional HMRC guidance in others.
• One administrative simplification with widespread support was the proposal to provide some form of exemption from the transfer pricing rules for UK-UK transactions, where there is little to no tax risk.

Permanent establishment

• The proposals will potentially bring domestic law more in line with the guidance on profit attribution in Article 7 of the OECD model tax convention, which will potentially provide more consistency for international groups operating across a number of jurisdictions.
• The consultation explored aligning the UK domestic law definition of permanent establishment more closely with that of Article 5 of the OECD model tax convention.
• There were concerns that this would lower the threshold for creating a “dependent agent permanent establishment”, in particular, for the financial services sector.
• Further, the respondents were keen to retain the UK-specific investment manager exemption.

Diverted Profits Tax (DPT)

• If adopted, the proposals will see DPT brought within the corporation tax regime. Respondents favoured this, a key reason being greater certainty about access to double tax relief under the UK’s double tax treaties.
• The higher rate and advance payment requirement will be retained under the proposals so arrangements which trigger DPT continue to be discouraged.
• The longer-term future of DPT remains in question and will be subject to the UK’s implementation of Pillar 2, with respondents encouraging HMRC to evaluate whether DPT is, in fact, still required.

Whilst largely positive, taxpayers currently affected by these regimes should ensure they understand how the proposals will impact them. If you would like to speak to a specialist in this area, please get in touch using the form below.