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DPT, transfer pricing and permanent establishment reforms: ICAEW responds


Published: 22 Aug 2023 Update History

ICAEW’s Tax Faculty welcomed HMRC proposals to make the UK legislation more closely aligned with OECD principles, but noted that there were good reasons to not fully adopt the OECD’s 2017 changes to the permanent establishment definition.

HMRC’s consultation document, published on 19 June 2023, contains proposals for the reform of transfer pricing, the definition of permanent establishments, and diverted profits tax. 

Transfer pricing 

The consultation sought views on three key areas: 

  • The provision (concerns the economic relationship between the parties).
  • The participation condition (the definition of connectedness).
  • The ‘one-way street’ (the tax advantage rule). 

The faculty welcomed most of these proposals but raised concerns regarding changes to the participation condition which, in its view, currently offers a high level of certainty for businesses due to its prescriptive and mechanical nature. 

Re-introducing an exemption for UK-to-UK transactions was also welcomed. The faculty stressed that this should be made as broad as possible. While a return to the previous blanket exemption is unlikely, exclusions that try to capture every situation where there are cash-tax differences could cause the exemption to be unduly complex. 

Overall, the changes were considered to make the UK a more attractive jurisdiction to invest or location a holding company in. 

Diverted profits tax (DPT) 

The consultation proposes to remove DPT as a separate tax and bring it within the transfer pricing regime (ie, within profits chargeable to corporation tax (CT)). 

The main benefits of bringing DPT into the CT regime are simplification and access to double taxation treaty relief. Faculty members questioned the need to retain DPT in the light of global solutions such as pillars one and two, and wider OECD plans on taxing multinationals. To mitigate against any ambiguity and complexity, incorporation of DPT into the CT regime should be achieved through legislative changes. 

Permanent establishments (PEs) 

The consultation considers updating the existing definitions and profit attribution rules (originally enacted in 2003) regarding UK PEs, to align more closely with DTTs and the 2017 OECD model convention. 

The faculty shared the mixed input it had received from members on the proposals. While some welcomed alignment with OCED principles, others expressed potential difficulties, especially with a change in the definition of ‘dependent agent’ to include those with a principal role in concluding contracts. 

It was also noted that the definition of PE is different for corporation tax purposes to the income and capital gains tax definition. It would be more consistent to align these. 

Read ICAEW’s response 

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