UK and International Tax news

Reform of Transfer Pricing, Permanent Establishments and DPT Rules

Wednesday 14th May 2025

HMRC has issued a policy paper on introducing a package of draft legislation in respect of the UK rules on transfer pricing, permanent establishments, and diverted profits tax.

Current transfer pricing rules require the pricing of transactions between connected parties to be based on the internationally recognised arm’s length principle. This principle seeks to determine what the price would have been if the transactions had been carried out under comparable conditions by independent parties.

The draft transfer pricing legislation proposes to simplify the UK transfer pricing rules in a number of areas including the participation condition, intangibles, commissioners’ sanctions, UK-to-UK transfer pricing, and financial transactions.

With regard to permanent establishments, the draft legislation proposes to bring UK rules into line with the latest international consensus on the definition of a permanent establishment and the attribution of profits to a permanent establishment. It will also clarify which supporting guidance and materials can be used in conjunction with UK legislation and update the legislation and Statement of Practice on the Investment Manager Exemption.

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

The draft legislation proposes a new charging provision for Unassessed Transfer Pricing Profits within corporation tax. This will be a significant simplification, together with the repeal of the Diverted Profits Tax in its entirety while retaining the essential features of the regime.

The previous government consulted on proposals to reform the UK’s legislation on transfer pricing, permanent establishment and DPT in the summer of 2023 and issued a summary of responses in January 2024.  In the Corporate Tax Roadmap 2024, the current government committed to holding a second round of consultation on this measure in Spring 2025.

HMRC has announced that the earliest operative date for the above measures will be from 1 January 2026.

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