UK and International Tax news

Reform of UK Law in relation to Transfer Pricing, Permanent Establishments and Diverted Profits Tax

Friday 9th February 2024

The government has released a summary of responses in respect of its consultation on reforms to three elements of UK international tax legislation: Transfer Pricing, Permanent Establishments, and Diverted Profits Tax. The aims of these reforms are to modernise and simplify these rules, in order to improve tax certainty and alignment with treaties.

On 19 June 2023, the government published a consultation document asking for views on the reform proposals. 42 written responses were received from representative bodies, professional advisers and individuals, and 4 public meetings held with over 300 people as part of the consultation.  The government has considered the responses and published its summary of responses document.

The transfer pricing rules require that, in calculating profits subject to corporation tax and income tax, transactions between connected parties should be priced on terms that would be expected if the transactions had been carried out under comparable conditions by independent parties.

This is an internationally recognised principle that is reflected in many of the UK’s double taxation treaties. This helps to ensure profits are taxed in the countries where activities giving rise to those profits are undertaken.

The government is proposing changes to the transfer pricing legislation to make the rules simpler, more certain and better aligned with tax treaties. The changes will affect both the core transfer pricing rules and their implementation in other parts of tax law.

Corporation tax is charged on the worldwide profits of UK resident companies, and the profits of non-UK resident companies insofar as they relate to activities carried on in the UK through a permanent establishment. This is an internationally recognised standard reflected in the UK’s double taxation treaties and is designed to ensure that countries only tax companies with a sufficient level of activity.

The government is considering whether to align the UK domestic definition of a permanent establishment with the definition set out in Article 5 of the 2017 OECD Model Tax Convention in light of stakeholder comments.

Regardless of whether those changes are made, the Investment Manager Exemption and Independent Broker Exemption will be retained. However, the government will consider whether changes are needed to clarify the operation of the IME and IBE.  n addition, the government will revise the current domestic legislation on PE attribution contained in CTA 2009 so that it aligns with Article 7 of the OECD MTC.  This will be supported by the Commentary and the OECD Report on the Attribution of Profits to PEs (AOA).

Diverted Profits Tax was introduced in 2015 and is a targeted measure that counters contrived arrangements designed to avoid profits being taxed in the UK. It is currently a standalone tax, though it borrows many of the principles of the transfer pricing and PE rules.

If engaged, tax is charged upfront at a higher rate than CT. The procedural rules have also addressed the information imbalances that can otherwise exist between HMRC and taxpayers in complex and long running transfer pricing enquiries.

The government will remove DPT’s status as a separate tax and bring an equivalent charge into CT. This will clarify the relationship between the taxation of diverted profits and transfer pricing. It will provide access to treaty benefits while maintaining key features of the regime.

The responses to the consultation will be used to inform the further development of these proposals together with a technical consultation on draft legislation in 2024.

For further information on the above, please contact Keith Rushen on 0207 486 2378.

 

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