1. Transfer Pricing Reforms
The proposed legislation modernises the UK’s transfer pricing rules, improving clarity and international alignment. Key measures include:
- UK-UK Transfer Pricing Exemption: A general exemption will apply to transactions between UK entities where there’s no tax loss risk. However, businesses may elect to apply transfer pricing if preferred.
- Expanded Participation Conditions: The rules will be widened to ensure all relevant related-party transactions are covered.
- Simplified Valuation Standards: A unified valuation approach will be introduced, using the arm’s length principle for cross-border related-party transactions.
- OECD Alignment for Guarantees: Rules regarding financial guarantees will now more closely follow OECD transfer pricing guidelines, improving international consistency.
2. Permanent Establishment Definition Updates
The definition of permanent establishment and profit attribution rules will be amended to reflect the current global tax consensus, enhancing clarity and consistency with international standards.
3. Replacing the Diverted Profits Tax (DPT)
A new provision under Corporation Tax will replace the DPT regime. Known as the Unassessed Transfer Pricing Profits (UTPP) charge, this change aims to simplify the relationship between diverted profits and transfer pricing, while improving access to double tax treaty benefits.
Additional Consultations and Proposals
Alongside the technical consultation, the government is also inviting feedback on several other proposals:
- Removing Transfer Pricing Relief for Medium-Sized Enterprises: With UK-UK transfer pricing rules largely repealed, the government suggests removing exemptions for medium-sized businesses.
- Reforming the Small Enterprise Exemption: Updates are proposed to ensure the rules remain effective and user-friendly, including aligning the definition of “enterprise” with that used in the participation exemption.
- New International Controlled Transaction Schedule (ICTS): In-scope businesses may be required to submit an ICTS report to HMRC, detailing cross-border, related-party transactions. This new reporting obligation would align the UK with international standards while minimising additional administrative burden.
These reforms follow an earlier consultation held in summer 2023, reflecting the government’s ongoing efforts to modernise the UK’s tax regime and strengthen its global competitiveness.