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Transfer Pricing | Accounting | Tax | Business Advisory

UK Modernizing Transfer Pricing, Diverted Profits Tax Rules

IBX-Jakarta. UK government is seeking stakeholders’ views on potential reforms to the UK international tax legislation on transfer pricing, permanent establishment, and Diverted Profits Tax.

The chief objective of the consultation is to clarify and modernize the legislation, and ensure it achieves its objectives, while developing simpler, legislation that is easier to understand, and supports growth by improving tax certainty.

Transfer pricing

The government is considering several changes to Part 4 Taxation (International and Other Provisions) Act 2010, including:

  • consolidating the participation condition whilst ensuring transfer pricing can apply to all instances of mispricing which arise as a result of the special relationship between the parties;
  • amending the ‘one-way street’ to remove the requirement to apply UK to UK transfer pricing to transactions where there is no overall UK tax advantage conferred by the mispricing;
  • repealing the requirement for a Commissioners’ Sanction relying instead on the existing (or modified) governance frameworks to ensure consistency.

Permanent establishment

The government’s intention is to update UK domestic legislation on permanent establishment to ensure that it remains aligned with the developing international framework around the prevention of double taxation. The government has identified two potential options to this end:

  • to define a UK permanent establishment and determine the profits attributable to it by direct reference in legislation to the permanent establishment and business profits Articles (Articles 5 and 7) in the relevant tax treaty. This would be subject to certain restrictions. Where no treaty is in place, Articles 5 and 7 of the OECD Model could be used;
  • to define a UK permanent establishment and determine the profits attributable to it by reference to the current OECD Model, which would be subject to the relevant tax treaty.

Diverted Profits Tax

The government is considering whether to remove Diverted Profits Tax’s status as a separate tax and bring it into corporation tax. This would clarify the relationship between Diverted Profits Tax and transfer pricing, and provide access to treaty benefits while maintaining key features of the regime.

The government intends to carry out a wider review of the Diverted Profits Tax regime to ensure that it continues to achieve the government’s wider aims, specifically with respect to the following aspects:

  • the ‘Effective Tax Mismatch Outcome’ identifies where contrived arrangements lead to a tax advantage. It is intended to apply whether the arrangements increase expenses or reduce income. The government is of the view that the rule applies in all of these circumstances, but is considering amending the rule to make this clearer;
  • the government wishes to ensure that it is clear that Diverted Profits Tax applies to scenarios where contrived arrangements have led to the creation, or increase, of a loss as well as to scenarios where they have led to a reduction of profit;
  • the government is considering whether to amend or replace the wording of the ‘Relevant Alternative Provision’ to ensure that this part of the legislation is aligned more closely with the UK’s tax treaties.



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