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UK international tax legislation to be reformed


Published: 29 Jun 2023 Update History

The UK government is seeking views on reforming the UK rules on transfer pricing, permanent establishments, and diverted profits tax.

HMRC has issued a consultation that will run for eight weeks to 14 August 2023. The aim is to simplify the existing rules and promote certainty by aligning domestic law with the OECD Model and bilateral tax treaties. 

Transfer pricing 

The first section of the consultation deals with transfer pricing (TP). TP is an internationally recognised principle. TP requires (in calculating profits subject to corporation tax and income tax) that transactions between connected parties should be priced on terms which would be expected if the transactions had been carried out under comparable conditions by independent parties. 

The UK TP rules have not substantially changed since 2004, although developments in the international tax environment have been effectively subsumed, as UK TP legislation must be interpreted in accordance with OECD principles. This includes each publication of the OECD TP guidelines, and updates to the OECD model as well as its commentaries.  

The consultation seeks views on three key areas of TP: 

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

Permanent establishments

Where a company resident in one state carries on business in another state, this may constitute a permanent establishment (PE) in that other state. Double taxation treaties (DTTs) between territories set rules to determine which state has the priority in taxing rights in such circumstances to avoid double taxation, among other functions.

The consultation considers updating the existing definitions and profit attribution rules (originally enacted in 2003) regarding UK PEs to align more closely with DTTs and the 2017 OECD model convention. 

For example, the consultation considers whether:

  • to define a UK PE by reference to the relevant DTT (or the 2017 OECD model tax treaty where there is no DTT); or
  • define a UK PE by reference to the current OECD model tax treaty subject to the provisions of any relevant DTT.

Other points around definition are also considered. This includes the ‘broker exemption’, ‘investment manager exemption’ and ‘independent agent’.

The changes considered are designed to bolster certainty and provide greater flexibility in treaty negotiations, as well as maintaining alignment with bilateral treaties and the OECD model. The aim is that this should enable subsequent changes to be more quickly incorporated into UK law.

The government is not considering any significant change to the rules governing foreign PEs.

Diverted profits tax

Diverted profits tax (DPT) was introduced in 2015, to counter the use of contrived and artificial arrangements by multinationals to avoid paying tax on profits that had been generated from economic activity in the UK. HMRC has indicated that DPT has helped conclude long-standing enquiries and raised £8bn so far. 

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)). Bringing DPT within CT is hoped to enhance certainty by clarifying the interplay between DPT and CT, as well as bringing it within the scope of DTTs and provide access to the mutual agreement procedure.

Have your say

HMRC is holding consultation events. Businesses can register to attend here

To provide input to inform ICAEW’s response, please contact Angela Clegg

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