On 19 June 2023 the UK government launched a consultation on potential reforms to the UK legislation on transfer pricing, permanent establishments, and diverted profits tax.
Transfer Pricing – provision
Currently section 147 TIOPA refers to a situation where a provision has been made or imposed as between any two persons by means of a transaction or series of transactions. The wording could be revised to bring it closer to Article 9(1) of the 2017 OECD Model which refers to conditions made or imposed between two enterprises in their commercial or financial relations.
Participation
A person is treated as connected to another for the purposes of the legislation if one participates directly or indirectly in the management, control or capital of the other party, or if they are both subject to direct or to indirect participation from a third person.
Control is generally defined as the ability to ensure that the affairs of the controlled person are conducted in accordance with the controlling person’s interests, by means of shareholding, voting power or other powers conferred by the articles of association or another document.
The current definition of the participation condition does not specifically include some circumstances where a party is subject to the excessive influence of another party such as a major creditor. This influence could cause the pricing to differ from the price that would otherwise have been agreed.
The UK government is therefore considering amending the provision to ensure that transfer pricing rules can apply to all situations where mispricing results from a special relationship between the parties. This could be done by omitting the participation provision; or by including a more general participation condition looking at any excessive influence or control exerted by one party over another, or on both by a third party.
UK-UK transfer pricing
The government is considering removing the requirement to apply UK to UK transfer pricing to transactions if there is no overall UK tax advantage resulting from the mispricing.
Diverted Profits Tax
The UK government is consulting on whether to include the diverted profits tax (DPT) as part of the corporation tax legislation rather than keeping it as a separate tax. This would ensure that taxpayers have access to treaty benefits in relation to the tax. The DPT also needs to be reviewed to ensure that it is achieving its objectives.
Permanent Establishment
Changes made to Article 5 of the OECD Model in 2017 aimed to address tax avoidance where multinational enterprises exploit mismatches between tax systems of different countries. The OECD’s multilateral instrument (MLI) introduced optional changes to Article 5 which were later included in the 2017 update of the OECD Model. The UK chose not to adopt the optional provisions concerning PE thresholds and UK tax treaties were not modified by the MLI to give effect to those changes.
The UK rules on attribution of profits to PEs pre-date the 2008 OECD Report on the Attribution of Profits to Permanent Establishments, which introduced the Authorised OECD Approach (AOA). The OECD has greater detail on principles of profit attribution, so the current UK legislative wording is no longer clear and can create uncertainty for taxpayers.
The UK government is therefore considering adopting the 2017 version of the OECD Model as the UK’s preferred approach in tax treaties. This change would extend the term ‘dependent agent’ to include a person who habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without modification by the enterprise. It would exclude from the permanent establishment definition an independent agent who acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related.
