As foreshadowed in April’s Tax Administration and Maintenance Day, HMRC has today (19 June 2023) launched a consultation on reforms to the UK tax rules on transfer pricing, permanent establishments and the Diverted Profits Tax.

The proposals include more closely aligning transfer pricing and permanent establishment rules with OECD principles (and, in the case of permanent establishments, aligning with applicable tax treaties), removing the need to apply transfer pricing rules to transactions within the UK which do not generate an overall UK tax advantage and consolidating the Diverted Profits Tax into corporation tax. There are also a number of targeted proposals relating to the application of transfer pricing rules, including provisions relating to specific non-arm’s length transactions, and the Diverted Profits Tax.

Some of these proposals would resolve uncertainties that have arisen from international tax measures evolving out of sync with UK domestic tax law. Others may simply reflect current practice: while current UK transfer pricing rules theoretically apply to domestic transactions, it is uncommon for large enterprises to apply the rules domestically where there is no net impact on UK tax payable (for example, where both entities are subject to the same corporation tax rate and in a net-payable position).

A number of approaches to the proposed reforms have been floated for discussion, and HMRC will be holding in-person consultation events prior to the deadline for submissions.

Responses to the consultation are due by 14 August 2023. If you are interested in discussing the consultation proposals, please speak to your usual Weil contact.