Reforms to Diverted Profits Tax (DPT), Transfer Pricing, and Permanent Establishments
Released on June 19, 2023, HMRC’s consultation paper puts forth suggestions regarding the alteration of transfer pricing, the delineation of permanent establishments, and diverted profits tax.
Centered on transfer pricing, the consultation paper requested input on three principal domains:
1. The provision (pertaining to the economic association between involved parties).
2. The participation condition (the delineation of interconnection).
3. The ‘one-way street’ (pertaining to the rule for tax advantage).
The majority of these propositions were favorably received by the faculty, although apprehensions arose regarding alterations to the participation condition. The current state of this condition, seen as offering a high degree of assurance to businesses due to its detailed and systematic character, was a cause for concern.
The reimplementation of an exemption for transactions within the UK garnered appreciation. However, the faculty emphasized the importance of maintaining a broad scope for this exemption. While a complete return to the prior across-the-board exemption seems improbable, creating exclusions aimed at encompassing all scenarios with cash-tax disparities might lead to undue complexity in the exemption.
On the whole, these modifications were evaluated as enhancements that would augment the UK’s allure as a jurisdiction for investment or the establishment of holding companies.
Restructuring of Diverted Profits Tax (DPT)
The consultation outlines a proposition to integrate DPT into the transfer pricing framework, thus incorporating it into the profits subject to corporation tax (CT), and eliminating its status as a distinct tax entity.
The primary advantages of this incorporation are twofold: simplification of processes and the opportunity to access relief through double taxation treaties. Among the faculty members, there was deliberation on the necessity of retaining DPT, particularly in the context of broader international solutions like pillars one and two, as well as the expansive multinational taxation plans outlined by the OECD. To preempt any potential complexities and uncertainties, the integration of DPT into the CT regime is recommended to be executed through legislative revisions.
Definition of Permanent Establishments (PEs)
The consultation document explores the possibility of revising the existing definitions and guidelines for profit allocation, initially enacted in 2003, in relation to PEs within the UK. The aim is to achieve closer alignment with Double Taxation Treaties (DTTs) and the OECD Model Convention of 2017.
Within the faculty, there was a diverse range of opinions among members concerning the proposed modifications. While some voiced their approval of harmonizing with OECD principles, others highlighted potential challenges, particularly in regard to the expanded scope of the ‘dependent agent’ definition to encompass individuals with significant roles in contract finalization.
Furthermore, a notable observation was made: the definition of PE varies between its application in the context of corporation tax and its use in defining income and capital gains tax. To establish a more coherent approach, aligning these definitions would be more congruent.
