Responses Published on UK Transfer Pricing, Permanent Establishments and Diverted Profits Tax Consultation

Earlier this week, the UK government published a summary of responses to the consultation on reforms to the UK transfer pricing, permanent establishments and the diverted profits tax (DPT) rules. The consultation was launched in June 2023, as discussed in our blog post.

The transfer pricing proposals included aligning terminology between the UK rules and the OECD model tax convention, expanding the participation condition to cover more non-arm’s length scenarios, and reviewing the mechanism for adjustments and potential misalignment or unfavourable outcomes. The consultation responses on transfer pricing were quite mixed, and the government will continue to consider aligning language but intends to make “targeted” changes to the participation condition to capture additional “known problem cases”. On transfer pricing adjustments, the government intends to retain the “one-way street” but may publish additional guidance. Domestic transfer pricing for transactions which do not change the overall UK tax payable will become optional. Some amendments, clarifications and additional guidance are expected on particular transfer pricing rules, in certain cases to more closely align with OECD transfer pricing guidelines, pending further review.

On the permanent establishment rules, the government intends to use a static definition of a permanent establishment based on the current OECD model tax convention in UK domestic law, which would then still be subject to the terms of any applicable treaty. The definition will be limited to a fixed place of business or a dependent agent PE. Some concerns were raised around additional filing obligations for a PE which does not owe any UK tax. The government is still considering these proposals. The Investment Manager Exemption and Independent Broker Exemption will be retained.

The government intends to retain the DPT, despite some submissions that it is no longer required, and considers that current international tax measures such as Pillar 2 do not replace domestic provisions such as the DPT. The multinational top-up tax introduced by Pillar 2 will operate alongside the DPT. However, DPT will no longer be a separate tax, and instead will be implemented as part of UK corporation tax. A new diverted profits assessment will be used to address avoided PEs (existing rules targeting foreign companies avoiding a UK taxable presence will not be directly replaced). If DPT results in double taxation across multiple countries, the mutual agreement procedure is expected to be available, although a further consultation on this is expected.

Draft legislation is expected this year on a number of the proposals in the consultation. It is unclear when the legislation will come into effect.

If you have any queries around the proposals, please speak to your usual Weil contact.