On April 28, 2025, HM Revenue & Customs (HMRC) in the United Kingdom published draft legislation for consultation, proposing significant reforms to the Transfer Pricing, permanent establishment,
and Diverted Profits Tax (DPT) rules. These reforms intend to simplify and modernize the UK’s international tax system, aligning it with the OECD standards and international tax treaties.
Main Reform Proposals
1. Transfer Pricing
The proposed reforms include:
- Participation condition: It is extended to include common management arrangements and introduces an anti-avoidance provision to prevent structures designed to circumvent this condition.
- UK-UK transactions: They exempt certain UK resident entity transactions from the Transfer Pricing rules if no risk of tax loss.
- Intangible assets: Transfers of intangible assets will be valued based on the Arm’s Length Principle.
- Financial transactions: The rules are aligned with the OECD guidelines, considering implicit support and explicit guarantees to determine interest rates.
2. Permanent Establishment
Its definition should be aligned with Article 5 of the OECD Model Convention 2017, including:
- Extending the dependent agent threshold to include those who play a principal role in concluding contracts.
- Reviewing the Investment Manager Exemption, eliminating the “20% rule,” and broadening its scope to cover a broader range of transactions.
3. Diverted Profits Tax (DPT)
The DPT should be repealed as a separate tax and must replace it with a new provision for taxing unsettled Transfer Pricing profits in corporate income tax, while retaining key features such as:
- Assessment based on Transfer Pricing principles.
- Access to mutual agreement procedures under tax treaties to avoid double taxation.
- Simplification of the application conditions, replacing the insufficient economic substance condition with a “tax design condition.”
Implications for Companies
These reforms aim to:
- Improve fairness: Multinationals must pay taxes on profits generated from economic activities in the UK equitably.
- Simplify existing rules: Development of more manageable, easier-to-understand legislation.
- Encourage growth: Improving tax certainty and continued access to treaty benefits, thereby promoting investment in the UK.
Participation in the Consultation
The consultation will be available until July 7, 2025. HMRC encourages companies, tax advisors, and other interested parties to review and comment on the draft legislation. There is a face-to-face and online consultation schedule program to facilitate participation.
Conclusion
The reform proposal is significant in modernizing the UK’s international tax system. Companies should assess the effects of these changes on their operations and tax structures.
How Can TPC Group Help?
At TPC Group, we have an expert Transfer Pricing team at your disposal.
Source: GOV.UK