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On 19 June 2023, the UK government launched a consultation on possible changes to three of the most fundamental aspects of the UK’s taxation of multinational enterprises (MNEs):

  • Transfer pricing - the basis on which profits are divided between jurisdictions as a result of transactions between two or more legal entities within the same MNE.
  • Permanent establishments - the attribution of part of the profits of a single legal entity to two or more jurisdictions.
  • Diverted Profits Tax - a targeted measure introduced in 2015 to counter what HMRC considers to be “contrived arrangements designed to avoid profits being taxed in the UK”.

HMRC sees the consultation as an opportunity for modernisation, to provide better clarity, and to maintain alignment with policy intention, international standards and the UK’s network of bilateral tax treaties.  Any reforms would be intended to improve fairness, produce simpler and more easily understandable legislation, and promote inward investment into the UK by increasing certainty and access to treaty benefits.

The specific issues under consideration in each of these categories is set out below.

The consultation will run for 8 weeks from 19 June to 14 August 2023, and responses should be sent by email to within that period.  In addition to some initial “consultation events”, HMRC also intends to consult separately by way of meetings with interested stakeholders.

After the consultation closes, the government will analyse and publish a response to the views expressed by stakeholders. Those views will be taken into consideration when the government decides whether to proceed with the proposals and, if so, in the development of the proposals with a view to announcing legislation at a future fiscal event.

What are the direct transfer pricing issues under consideration?

In terms of direct changes to the transfer pricing rules, HMRC is seeking views on the following:

  • Alignment of the UK’s use of the term “provision” with the OECD’s use of “conditions” when assessing the consistency of arrangements within an MNE with the arrangements that would exist between independent parties.
  • Reframing the concept and definition of the relationship between counterparties which would impose the requirement to consider whether arm’s length pricing has been applied, with a potential expansion of the definition to take into account “excessive influence”, for example by a major creditor.
  • Clarifying the general purpose and application of the “one-way street”, which requires, on a provision by provision basis, an upwards adjustment to UK taxable profits where necessary to comply with the arm’s length principle, but prohibits a downwards adjustment.
  • Targeted relaxation of the general requirement to apply transfer pricing UK-UK where a non-arm’s length provision does not provide an overall UK tax advantage.
  • Amending the specific UK rules which apply to transactions involving loans and guarantees to align them with updates to the OECD Transfer Pricing Guidelines (Chapter X) in this area.
  • Provide a simpler and more certain alternative to the current compensating adjustment mechanism to enable UK borrowing capacity as a whole to be taken into consideration.
  • Placing greater emphasis and clarity on HMRC’s internal governance framework in ensuring consistency of treatment and outcome.

What other issues associated with transfer pricing are under consideration?

In addition, consideration will be given to the interaction and consistency (or otherwise) between the transfer pricing rules and other legislation.  Changes to legislation may be accompanied by guidance to address “certain areas of ambiguity and uncertainty”.

One of the specific areas under review concerns loan relationship and related issues, including derivative contracts and the treatment of foreign exchange movements, where CTA 2009 also addresses instances of non-arm’s length arrangements, and where some simplification and alignment may be appropriate.

The other specific area focuses on related party transactions in intangibles and valuation methodologies.  Intangible asset legislation can result in the application of an “arm’s length price” valuation, but can also replace that with a “market value” amount if that is greater, and the potential for different outcomes increases the burden on taxpayers and makes tax certainty difficult to achieve.  The proposal under consideration is to move to the arm’s length principle as a single valuation standard, changing the intangible assets legislation to reflect this.  This may address some of the current challenges but the high level of complexity and divergent views that can be involved in the application of the arm’s length principle to intangibles will need to be factored in. 

What are the permanent establishment (PE) issues under consideration?

On the face of it, there is a relatively narrow focus here, centred on what the reference point should be for the definition of a PE in domestic legislation and the determination of the profits attributable to it.  The two options under consideration are:

  • To define a UK PE and attribute profits by direct reference in domestic legislation to the PE and Business Profits Articles (usually Articles 5 and 7) in the relevant double taxation treaty, subject to certain restrictions such as not creating service or insurance PEs, which are not a feature of the OECD Model, where the treaty contains such features. (Where no treaty is in place, Articles 5 and 7 of the 2017 OECD Model could be used)
  • To define a UK PE by reference to Article 5 and align PE attribution with Article 7 respectively of the current OECD Model, which would be subject to the relevant double taxation treaty

One particular consequence of the second option would be the extension of the domestic definition of a PE for the first time as a result of the amended 2017 OECD Model wording in relation to “dependent agent” PEs, whereby:

  • Such PEs would include someone who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”, without the need for them to actually conclude the contracts
  • The “independent agent” exemption from PE status would not apply where “a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related”.

Although the UK signed up to the Multilateral Instrument (MLI) which implemented a range of tax treaty measures coming out of the BEPS project, it did not adopt the MLI measures in relation to dependent agent PEs, which would otherwise have incorporated the above amendments into a number of the UK’s treaties, depending on the treaty partner position in each case.  At this stage we are not aware that the UK intends to change its positions regarding the MLI and therefore the impact might be limited to situations where there is no double tax treaty or where a new treaty is negotiated to include the expanded definition, but the above changes would enable such a change in MLI policy to be implemented very quickly were this MLI policy position to change in the future. 

In addition to the PE threshold options above, HMRC is also considering amending the domestic provisions in relation to profit attribution to align with the OECD Report on the Attribution of Profits to Permanent Establishments, known as the AOA.    

What are the Diverted Profits Tax (DPT) issues under consideration?

The headline issue is whether to remove DPT’s separate tax status and bring it within the scope of Corporation Tax by way of a new “diverted profits tax assessment”, explicitly acknowledging the connection between DPT and transfer pricing, and providing access to treaty benefits.  This is seen as a notable simplification which would provide greater certainty and clarity.

In addition, there are some points which HMRC is looking to clarify in law to reflect their position in practice, including:

  • Confirming that the Effective Tax Mismatch Outcome (in essence the DPT approach to “tax advantage”) applies equally to a reduction in UK income as it does to an increase in UK expenses
  • Clarifying that DPT applies to the creation or increase in the amount of a loss and not only to a reduction in profit
  • Aligning the wording of the “Relevant Alternative Provision” (akin to the comparison with a third party transaction) more closely to the UK’s tax treaties

There is an open invitation to provide more general views on the operation of the rules.

What is the way forward and how can you get involved?

If you have any questions on the above summary, or would like to discuss the consultation document at a more detailed level, please do get in touch with your usual PwC contact or with one of our specialists: 

  • PE - Mike Cooper or Sonia Watson
  • TP - Steve Lord or Will Barritt
  • DPT - Ravi Ahlawat