UK tax advisers hail transfer pricing, diverted profits tax reform

The Chartered Institute of Taxation (CIOT) has welcomed proposed reforms to the UK legislation on transfer pricing, permanent establishments, and diverted profits tax.

The tax measures are aimed at aligning the UK’s domestic legislation with equivalent international OECD standards to ensure consistency of application. In June this year, the UK government launched a consultation seeking public input on the reforms, clarifications, and new policies being proposed and the design features of said policies.

Responding to the consultation, the CIOT said: “Differences from the agreed international guidelines complicate compliance for taxpayers and reduces the benefit of having reached a global consensus as to what the rules should be. The updated rules could provide greater certainty, assist in the settlement of mutual agreement procedures (MAP) and enhance the attractiveness of the UK.”

The CIOT, however, warned that the areas under consideration “are complicated and care will be required to ensure the objectives are met.”

The CIOT welcomed the proposed changes to the transfer pricing rules but suggested that “consideration is given to how the rules could be written so as to not inevitably include joint ventures, and automatically treat these as connected when developing the tests of connectedness.”

The CIOT said that it is “undecided” about the proposals to align the UK domestic definition of permanent establishment (PE) with Article 5 in the 2017 OECD Model.

It submitted: “Doing so would be a simplification, for both taxpayers and tax administrators, and we support the principle of aligning with the OECD Model. However, the concerns expressed by businesses about the potential impact of the changes to Article 5 (that the changes would cause less certainty and, potentially, lead to a proliferation of PEs) remain valid; insufficient time has passed to conclude that they are not giving rise to the problems foreseen.”

The CIOT said that “a closer alignment of a diverted profits charge assessment to the corporation tax enquiry framework would be a welcome simplification and that bringing diverted profits tax into corporation tax would be beneficial.”

“In particular, it would bring diverted profits tax within the scope of double tax treaties, including access to MAP for resolving disputes,” it said.