UK international tax reform on the horizon?

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Respondents to the consultation on UK law reform of the transfer pricing, permanent establishment and diverted profits tax rules launched in 2023 broadly agree with the proposed direction of travel. However, they pointed out some areas of concern. A technical consultation will launch later this year on any legislation required to bring the changes into effect. 

Transfer pricing 

There is a tension between the need to simplify the rules and the desire to retain existing principles that are well-understood, according to the responses. Many aspects of the rules were considered. Areas most in need of simplification include: 

• elements of the participation condition, including the ‘acting together’ rules at ss161 and 162, Taxation (International and Other Provisions) 2010; and
• foreign exchange calculations, which will be brought within the transfer pricing rules. 

The government is committed to the “one-way street” principle. This requires that an adjustment is made for a chargeable period only where there is a tax advantage for that period. The adjustment is calculated by reference to that period only. It does not take into account possible disadvantages in later periods, for example. The government  acknowledges that this may lead to unfair outcomes and will consider providing additional guidance.  

The UK-UK transfer pricing rules may be relaxed in certain situations where the UK tax base is not disadvantaged. 

Permanent establishments (PE)

There is a desire to align the UK’s domestic provisions for profit attribution more closely with Article 7 of the OECD’s model tax convention (MTC). 

The government continues to consider whether to adopt the definition of a PE contained in Article 5 of the OECD’s MTC in UK law. If that definition is adopted, the government would retain a static definition in UK law that includes relevant exemptions. Such a move intends to ensure continuity and prevent friction with the fundamental charging provision in s5, Corporation Tax Act 2009. 

Diverted profits tax (DPT) 

The government’s intention to bring DPT within the framework for corporation tax (CT) was broadly welcomed by respondents. It was agreed that this would simplify the rules and improve certainty. There was also support for access to double tax relief under the UK’s treaty network. 

It is intended that amounts currently charged under DPT would be subject to a standalone CT charge at a higher rate.  

The government rejected suggestions raised by ICAEW’s Tax Faculty and others that retaining DPT is no longer appropriate given the OECD’s work on global solutions such as pillar one and pillar two. The government will keep the regime under review and will consider the impact of the evolving tax landscape. 

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