A summary of government consultations on reforming UK transfer pricing and permanent establishment rules
In July 2023, the Government released a consultation asking for views on a proposed reform of UK tax rules relating to transfer pricing, permanent establishments, and diverted profits tax.
This consultation was aimed at expanding the clarity and consistency of the current UK tax rules relating to these areas in line with international standards (mainly OECD), the UK’s double tax treaties and policy intentions.
It is likely that partnerships will be interested in the proposals related to transfer pricing and permanent establishments.
Pricing transfers
First, the consultation focused on transfer pricing (TP), which requires that profits generated by connected parties be calculated as if they occurred between independent parties.
In the last decade, the UK hasn’t changed its TP rules much; however, the international tax environment has evolved substantially since then (including updated OECD TP guidelines and the OECD Model).
The consultation was focused on three main areas:
- The tax advantage {rule one-way street}.
- The ‘provision’ (the economic relationship between the two parties);
- The ‘participation condition’ (how connectedness should be defined); and
UK domestic law with the OECD Model and tax treaties there aim is to promote certainty by aligning.
Additionally, the Government asked for comments on whether domestic transactions should remain subject to TP Rules.
There may be exceptions to any relaxation, however, to ensure that scenarios that have a detrimental impact on the UK tax base do not fall within it.
To avoid double taxation, DTTs include rules determining which country has primary taxing rights for foreign companies operating in another country.
The UK(United kingdom) domestic legislation, which establishes the tax charge, was originally drafted in 2003 and reflected the PE principles in the OECD Model at that time, the Government does not intend to make any significant modifications to these rules. Since then, a lot of significant global developments have occurred, and the OECD’s methodology has changed. As a result, there is now ambiguity around what constitutes a PE and how profits are assigned to it.
Therefore, in order to maximize certainty, allow greater flexibility in treaty negotiations and to maintain alignment with DTTs and the OECD Model as they develop further, the Government is contemplating revising UK legislation.
The consultation made it clear that the current exclusions that there is an intention to retain the current exemptions for UK brokers and investment managers (treating them as independent agents when certain conditions are met).
