Reforming transfer pricing, permanent establishments and Diverted Profits Tax – Government response

19 January 2024

Following a consultation over the summer of 2023 the Government has considered the responses it received to its proposals to reform transfer pricing, permanent establishment rules and the Diverted Profits Tax (DPT). Broadly, the proposals seek to align the UK rules with international standards and double tax treaties as well as bring clarity and certainty.

The key takeaway from the Government response is that the Government intends to move ahead with its proposal to remove DPT as a separate tax and bring it within the scope of corporation tax. The unique compliance features of the regime (a higher rate and advance payment) will be retained but administratively this move will be welcome and furthermore, will ensure that future diverted profits charges are unequivocally subject to the UK’s double tax treaties (which HMRC has historically disputed).

With respect to the rules around permanent establishments, the Government appears to be buying some time by undertaking further consideration on whether to align the UK domestic definition of a permanent establishment with the revised definition in the 2017 OECD Model Tax Convention. The main effect of this change would be to widen the range of arrangements that would constitute a dependent agent PE (DAPE). Asset managers that rely on the Investment Management Exemption (IME) will welcome the confirmation that, irrespective of whether these reforms take place, the IME will be retained. However, the government is still considering whether changes are needed to the IME therefore the industry should monitor how this unfolds. The Government has committed to revising the UK domestic legislation on permanent establishment attribution to align with the Authorised OECD Approach.

On transfer pricing the Government has committed to making a series of benign technical changes. One welcome easement relates to the application of UK:UK transfer pricing which will reduce the compliance burden on businesses.

In terms of next steps, the Government will undertake a technical consultation on the draft legislation in 2024 in relation to the proposals it has committed to take forward. We could expect to see this in the summer. As mentioned, changes to the permanent establishment definition are under further consideration which may involve some stakeholder engagement so we can expect this aspect to run to a different timetable.