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22 June 20239 minute read

Shaping the future

UK tax authority seeks input on transfer pricing reform

The UK government is soliciting taxpayers’ insights on proposed reforms to domestic legislation on transfer pricing, permanent establishments, and the Diverted Profits Tax. The aim is to create is a simplified, streamlined, and modernised domestic law while promoting tax certainty. This is envisaged to be achieved by bringing UK domestic law into alignment with the OECD Model and bilateral tax treaties.

In line with the announcement made on the Tax Administration and Maintenance Day on 27 April 2023, the UK tax authority (His Majesty’s Revenue and Customs (HMRC)) has initiated an active review of a comprehensive set of proposed changes to three significant elements of UK international tax legislation: transfer pricing (TP), permanent establishments (PE), and Diverted Profits Tax (DPT). As part of this process, HMRC issued a comprehensive questionnaire featuring 35 specific consultation questions. The consultation period will span eight weeks, allowing stakeholders to contribute until 14 August 2023.

This consultation presents a unique opportunity to shape the future of the UK tax law by offering feedback on the proposed reform and the design elements of new policies. We have summarised the primary components of the proposed reform below, with the aim of helping you to influence the future direction of the UK tax landscape.


Transfer Pricing

Transfer pricing plays a crucial role in influencing the application of other tax regulations, as it revolves around the concept of the arm’s length principle, which directly impacts tax calculations.

The UK transfer pricing rules have remained largely unchanged since 2004 and are now set out in the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).

Although the UK’s domestic legislation does not offer a specific definition of the arm’s length principle, it sets out a framework for its application. Currently, there are three fundamental concepts within this framework that underpin the UK’s transfer pricing rules and are undergoing review:

  • The provision concerns the economic relationship between two parties, which forms the basis of applying the arm’s length principle. The current framework allows for a narrower interpretation than the OECD’s equivalent concept, conditions made or imposed between the two persons in their commercial or financial relations." Due to its interaction with the potential tax advantage rule, the scope of provision" can have a material impact on the amount of tax payable.

    Proposed changes: The government is considering revising the current concept to align with the language of Article 9(1) of the OECD Model.
  • The participation condition defines the relationship and the level of connectedness between parties. It is a preliminary rule necessary to determine the entities and transactions that fall within the scope of UK transfer pricing rules, taking into account the fact that the key question for transfer pricing purposes is not whether parties are connected but whether the terms agreed between them are distorted due to this special relationship.
    In general, a person is treated as connected to another if it participates directly or indirectly in the other’s management, control, or capital. The definition of control in the UK legislation is complex and, in some cases, may fail to encapsulate specific scenarios that a broader definition of the rule could cover.

    Proposed changes: The government is examining international practices for defining connectedness to establish an appropriate framework. The aim is to distinguish between transactions at higher risk of non-arm’s length pricing and those clearly in the arm’s length scope.
  • The tax advantage rule or one-way street prevents unilateral negative adjustments to profits or losses, which would otherwise lead to non-taxation. The one-way street currently operates at the level of a provision (which must be between two persons) and on a chargeable period basis.

    Proposed changes: The government plans to provide further guidance to clarify the general purpose and application of the one-way street.

The UK government has identified additional areas of transfer pricing as part of the proposed reform. These include:

UK:UK transfer pricing

Under the existing Part 4 TIOPA 2010, no differentiation is made between domestic and cross-border transactions. It governs provisions between UK entities (UK:UK transfer pricing) as well as cross-border provisions. Consequently, all domestic transactions, even those not resulting in an overall reduction of the UK tax base, are subject to transfer pricing rules.

Proposed Changes: The government is contemplating easing the general application of UK: UK transfer pricing to reduce the compliance burden on businesses. Any amendments will likely be constrained by an exception to cover scenarios where mispricing negatively affects UK tax impact, thereby ensuring that avenues for manipulation are not inadvertently created.

Transfer Pricing Governance Framework

Special operational rules governing transfer pricing determinations (such as closure notices or discovery assessments) are incorporated in TIOPA 2010. Furthermore, HMRC follows a transfer pricing governance framework designed to guarantee that enquiries are resolved on a principled and consistent basis, aligning with the Litigation and Settlement Strategy (LSS). This document, developed and applied since 2007, post-dates the last significant changes made to the UK’s transfer pricing legislation.

Proposed Changes: The government is considering the repeal of several sections of TIOPA 2010, choosing instead to rely on existing (or modified) governance frameworks to ensure consistency, or introduce a system where taxpayers can request that a review of charge by a Designated Officer of HMRC.

Financial Transactions

Part 4 of TIOPA 2010 contains several specific sections related to the transfer pricing of financial transactions. Presently, the legislation does not permit increased borrowing capacity via a guarantee from a connected party. The rules that require the disregard of the effects of a guarantee from a related party were designed to prevent a UK entity from being excessively leveraged above the amount of debt it could secure at arm’s length.

Proposed Changes: The government is examining whether adjustments should be made to Part 4 TIOPA 2010 to align with international standards and to allow the consideration of implicit support and guarantees, where relevant, when determining the amount and terms of debt available at arm’s length.

Valuation Methodologies

The existing law requires companies to carry out multiple valuations when calculating gains and losses related to intangible fixed assets. Although these regulations are founded on similar principles, the market value of an asset may, under certain circumstances, vary from its arm’s length price. This is due to the arm’s length principle, which factors in the unique characteristics of the actual buyer and seller involved in the transaction.

Proposed Changes:  The government is considering aligning Part 8 of the Corporation Tax Act 2009 (CTA 09) – the Intangible Fixed Assets Regime – and Part 4 of the TIOPA 2010 to eradicate discrepancies in valuation approaches. This change would mandate companies to use the arm’s length principle for determining the value of the intangible asset in transactions between related parties.

The proposal to implement the arm’s length principle as the common standard could expand the number of transactions qualifying for the Advance Pricing Agreement programme (APAs). This change would address the existing challenge of reaching an agreement on the market value of an asset.


Permanent Establishments

The UK existing domestic laws governing PE are based on rules enacted in 2003, reflecting the PE principles of the OECD Model at the time. Whilst specific tax treaties may not completely correspond with the UK’s domestic laws, section 6 of the TIOPA 2010 ensures that in the event of a double taxation treaty, the treaty’s position supersedes domestic regulations.

This legislation embodies the UK’s interpretation of Article 5 of the pre-2017 OECD Model. Notably, the existing laws on profit attribution were also conceived before the OECD’s 2008 Report on the Attribution of Profits to Permanent Establishments, often referred to as the Authorised OECD Approach (AOA).

In 2017, the OECD Model underwent extensive revisions, as a result of the Base Erosion and Profit Shifting (BEPS) project. Specifically, updates to Article 5 were aimed at tackling tax avoidance strategies employed by multinational companies exploiting discrepancies and mismatches in domestic tax systems. The recent updates to the OECD Model and the difference with national law has made the current legislative wording less clear compared to when it was initially introduced, which increases uncertainty for taxpayers.

Proposed Changes: The government is considering updating the UK domestic legislation on PEs, including a potential adoption of the 2017 version as the UK’s preferred approach in tax treaties. Such a move would bolster clarity, maintain alignment with bilateral treaties and the OECD Model, and introduce greater degree flexibility in treaty negotiations.


Diverted Profits Tax

The UK government launched the Diverted Profits Tax (DPT) in 2015 as a tool to counter artificial arrangements to circumvent the taxation of profits derived from economic activities in the UK. DPT has proven effective in tackling profit diversion and information imbalances partly due to its unique features, such as levying tax at a higher tax rate than the CT rate (31% from April 2023) with upfront payment, among others. Currently existing as a standalone tax, DPT draws extensively from the principles of transfer pricing and PE rules. It has supported HMRC in resolving or closing long-standing enquiries, and so far, it has secured over £8 billion.

Proposed Changes: The government is considering whether to embed DPT into Corporation Tax (CT), while preserving the essential characteristics of its existing framework. This change would enhance tax certainty by clearly defining the interplay between DPT and other aspects of the CT framework, e.g., ensuring that profits are taxed once, are subject to a single tax-related penalty, and that amendments to a taxpayer’s tax return will reduce the amounts subject to a DPT charge.



The proposed reform to the UK transfer pricing legislation holds significant importance for both the government and businesses operating in the country. It signifies a strategic move towards simplification, enhanced tax certainty, and alignment with international standards, specifically the OECD Model and bilateral tax treaties. The UK government aims to clarify the interplay of different tax elements and reduce ambiguities, ensuring that businesses face a single, unified tax framework.

The proposed changes to transfer pricing rules will modernise the UK’s tax system in line with evolving international tax practices. This reform also opens an avenue for businesses to contribute to shaping the future tax landscape through the consultation process. Given the far-reaching implications of these changes, the reform will undoubtedly play a pivotal role in fostering a fair, efficient, and robust tax environment in the UK.

Considering the proposed changes (which will be further refined based on the input received from taxpayers), multinational groups with UK operations should consider reviewing their structures, transactions and pricing to determine applicability and impact.

We will continue to monitor and further report on UK reform-related developments.