Consultation outcome

Reform of UK law in relation to transfer pricing, permanent establishment and Diverted Profits Tax

Updated 16 January 2024

Summary

Subject of this consultation

This consultation seeks views on potential reforms to the UK legislation on transfer pricing, permanent establishments, and Diverted Profits Tax.

Scope of this consultation

Views are sought on the reforms, clarifications, and new policies being proposed and the design features of said policies.

Who should read this

All UK businesses within scope of the transfer pricing legislation or permanent establishments legislation, and potentially within scope of the Diverted Profits Tax legislation, advisory firms, representative bodies and legal firms.

Duration

The consultation will run for 8 weeks from 19 June to 14 August 2023.

Lead officials

The lead officials are Jamie Vernon, Paul Mitchell and Helen Steer of HM Revenue and Customs (HMRC)

How to respond or enquire about this consultation

Please email responses to [email protected].

We will also be holding a number of consultation events:

• 27 June (registration closes 23 June)
• 30 June (registration closes 26 June)
• 6 July (registration closes 29 June)
• 10 July (registration closes 29 June)

To register please complete this registration form before the closing date for your preferred event.

Additional ways to be involved

Officials will hold meetings with interested stakeholders who wish to discuss the proposals. This is a technical issue which is largely of interest to the tax profession, therefore officials will approach stakeholders likely to have interest through established channels.

After the consultation

After the consultation closes the government will analyse and publish a response to the views expressed by stakeholders. These views will feed into considerations on whether to proceed with the proposals and the design of the specific policies.

If it is decided to proceed with some, or all, of the policies proposed in this consultation the government will develop the proposals with a view to announcing legislation at a future fiscal event or events.

Previous engagement

The government has not previously consulted on these proposals.

1. Executive summary

As announced on Tax Administration and Maintenance Day (27 April 2023), the government is considering a package of reforms to 3 elements of UK international tax legislation: transfer pricing, permanent establishments, and Diverted Profits Tax.

This consultation offers the opportunity to consider how the UK’s domestic rules can be modernised to ensure that their application is clear to taxpayers, and the outcome of their application remains consistent with the underlying policy intention, international standards, and the UK’s bilateral tax treaties.

The package of reforms is intended to:

• improve fairness: ensuring multinational enterprises (MNEs) pay tax on profits generated from economic activity in the UK in the same way as other businesses

• simplify existing rules: aiming to develop simpler legislation that is easier to understand

• support growth: improving tax certainty and continued access to treaty benefits, thereby promoting inward investment into the UK

1.1. Which rules are being considered?

Transfer pricing rules: The transfer pricing rules require that, in calculating profits subject to Corporation Tax (CT) and Income Tax (IT), transactions between connected parties should be priced on terms that would be expected if the transactions had been carried out under comparable conditions by independent parties.

This is an internationally recognised principle that is reflected in many of the UK’s double taxation treaties, which helps to ensure profits are taxed in the countries where activities giving rise to those profits are undertaken.

Permanent establishment (PE) rules: CT is charged on the worldwide profits of UK resident companies, and the profits of non-UK resident companies insofar as they relate to activities carried on in the UK through a PE. This is an internationally recognised standard that is reflected in the UK’s double taxation treaties and that is designed to ensure that countries only tax companies with a sufficient level of activity.

Diverted Profits Tax: Introduced in 2015, Diverted Profits Tax is a targeted measure that counters contrived arrangements designed to avoid profits being taxed in the UK. It is currently a standalone tax, though it borrows many of the principles of the transfer pricing and PE rules.

If engaged, tax is charged upfront at a higher rate than CT. Diverted Profits Tax’s procedural rules have also been successful in addressing the information imbalances that can otherwise exist between HMRC and taxpayers in complex and long running transfer pricing enquiries.

All of these rules are important for HMRC as they seek to ensure that the appropriate amount of profit is taxed within the UK. They are also important to taxpayers who seek to get their tax affairs right. This is because the division of taxing rights across different jurisdictions can give rise to double taxation. The principles underpinning these rules which govern the allocation of profits between jurisdictions are based on internationally agreed standards.

The purpose of this consultation is to consider how the UK’s domestic rules can best be updated, simplified, and clarified to ensure that their application is clear to taxpayers, and the outcome of their application remains consistent with the underlying policy intention, international standards, and the UK’s bilateral treaties.

1.2. Summary of proposals

The consultation sets out a package of proposed changes and clarifications that the government considers would deliver on the above objectives. The proposals have been informed both by HMRC’s own experience in applying these rules, and by engagement with stakeholders through compliance activity and external forums.

The consultation raises a number of questions for respondents in order to ensure that, in considering these proposals further, the government has a full understanding of respondents’ views and experiences.

Transfer pricing

The government is considering changes to Part 4 Taxation (International and Other Provisions) Act 2010 (TIOPA 10), including:

• amending ’provision’ within s. 147 TIOPA 10 to better replicate the language of Article 9(1) of the 2017 OECD Model Tax Convention on Income and Capital (OECD Model)

• consolidating the participation condition at ss. 157–163 TIOPA 10, whilst ensuring transfer pricing can apply to all instances of mispricing which arise as a result of the special relationship between the parties

• amending the ‘one-way street’ at s. 155 TIOPA 10 to remove the requirement to apply UK to UK transfer pricing to transactions where there is no overall UK tax advantage conferred by the mispricing

• repealing the requirement for a Commissioners’ Sanction at ss. 208–211 TIOPA 10, relying instead on the existing (or modified) governance frameworks to ensure consistency

• amending ss. 152–154 and 191–194 TIOPA 10, which determine the application of transfer pricing to transactions involving loans and guarantees, to better align with the OECD Transfer Pricing Guidelines and to better achieve the policy objective of those rules

The government is also considering changes to other legislation which applies Part 4 TIOPA 10, including:

• whether to amend the rules at ss. 845-849AD Corporation Tax Act 2009 (CTA 09) which govern the taxation of related party transactions in intangibles to move to a single valuation standard, and better align its outcome with treaties

• whether to make improvements to the rules at ss. 444–447 and 693–694 CTA 09 which govern the taxation of loan relationships and derivative contracts which result from transactions not at arm’s length

• as part of this process, the government has also identified certain areas of ambiguity and uncertainty which it intends to address via guidance

Permanent establishments (PE)

The government’s intention is to update UK domestic legislation on PEs to ensure that it remains aligned with the developing international framework around the prevention of double taxation. The government has identified 2 potential options to this end:

• to define a UK PE and determine the profits attributable to it by direct reference in legislation to the PE and Business Profits Articles (Articles 5 and 7) in the relevant double taxation treaty. This would be subject to certain restrictions. Where no treaty is in place, Articles 5 and 7 of the OECD Model could be used

• to define a UK PE and determine the profits attributable to it by reference to the current OECD Model, which would be subject to the relevant double taxation treaty

Diverted Profits Tax

The core issue which the government is considering is whether to remove Diverted Profits Tax’s status as a separate tax and bring it into CT. This would clarify the relationship between Diverted Profits Tax and transfer pricing, and provide access to treaty benefits while maintaining key features of the regime.

The government also wants to use this opportunity to carry out a wider review of the diverted profits regime to ensure that it continues to achieve the government’s wider aims, specifically with respect to the following aspects:

• the Effective Tax Mismatch Outcome (ETMO) identifies where contrived arrangements lead to a tax advantage. It is intended to apply whether the arrangements increase expenses or reduce income (even if some income is still reported). The government is of the view that the rule applies in all of these circumstances, but is considering amending the rule (ss. 107–108 FA15) to make this clearer

• the government wishes to ensure that it is clear that Diverted Profits Tax applies to scenarios where contrived arrangements have led to the creation, or increase, of a loss as well as to scenarios where they have led to a reduction of profit (ss. 84–85 FA15)

• the government is considering whether to amend or replace the wording of the Relevant Alternative Provision (RAP) to ensure that this part of the legislation is aligned more closely with the UK’s tax treaties (s. 82 FA15)

The government welcomes respondents’ views on these options, but also invites more general views on the detailed operation of the rules in this area.

The government’s intention is to legislate any changes in a future Finance Bill.

2. Introduction

International tax rules govern the taxation of cross border transactions and other economic relationships. With the increase in international commerce, international tax rules have grown in importance – both for tax authorities, who want to ensure that their domestic tax bases aren’t artificially eroded, and for taxpayers, who are concerned with the avoidance of double taxation.

Tax authorities have powers under national laws to adjust for tax purposes accounts of entities which are part of a multinational enterprise, to secure appropriate allocation of income.

Transfer pricing is a means of pricing transactions between connected parties, based on the internationally recognised arm’s length principle which seeks to determine what the price would have been if the transactions had been carried out under comparable conditions by independent parties.

A State’s transfer pricing rules impose the domestic requirement to compute taxable profits in accordance with the arm’s length principle. From 1915, UK legislation gave power to assess a non-resident person doing business with a related resident on a percentage of turnover ((Finance (No. 2) Act 1915, s. 31, amending the Income Tax Act 1842, to make non-residents chargeable through a local branch).

This was replaced in 1951 with a general power to adjust the prices of transactions between related entities, which culminated in 1998 in the introduction of transfer pricing into Schedule 28AA Income and Corporation Taxes Act 1988 (ICTA 88). This power to apply arm’s length pricing was redrafted in TIOPA 10.

Multinational groups may include some companies that operate within more than one jurisdiction. Where a company resident in one state carries on business in another state, this may constitute a PE in that other state. Double taxation treaties between territories set rules to determine which state has the priority in taxing rights in such circumstances to avoid double taxation, among other functions.

A state is permitted to tax a PE in its country where the activities carried out by that PE reach agreed thresholds. Typically, the country where the enterprise is resident will provide relief for the tax already paid in the PE country or exempt the profits from tax.

In the UK, Diverted Profits Tax addresses contrived arrangements designed to erode the UK tax base. It was introduced in Part 3 of Finance Act 2015 (FA 15) as a targeted measure to ensure that profits taxed in the UK fully reflect the economic activity here.

Diverted Profits Tax has proved an effective tool in challenging profit diversion and addressing information imbalances between HMRC and taxpayers. It has helped HMRC to settle or successfully bring to decision point long running enquiries and has so far secured over £8 billion ^{[footnote 1]}.

3. Transfer pricing

3.1. Why is the government considering reform of transfer pricing?

There has been a lot of change in the international approach to transfer pricing. The OECD’s Base Erosion and Profit Shifting (BEPS) project was given political backing in 2013 by the G20 world leaders and following a package of reports in 2015 work has continued, now within the Inclusive Framework.

The G20’s mandate for BEPS was to ensure multinationals would be taxed ‘where economic activities occur and value is created’ (G20 2013: 4). The BEPS Action Plan (OECD 2013) defined the scope for the work on transfer pricing, excluded alternatives to the arm’s length principle, particularly formulary apportionment, and affirmed that the existing international rules operate ‘effectively and efficiently’ (OECD 2013: 19).

The UK’s transfer pricing rules have not been substantively updated since 2004, however developments in the international tax environment have been effectively brought into UK domestic legislation via s. 164 TIOPA 10 (and predecessor provisions), setting out that UK transfer pricing legislation should be interpreted in accordance with OECD principles. This includes the publication of later editions of the OECD Transfer Pricing Guidelines, and updates to the OECD Model and its commentaries.

3.2. The basic pre-condition

S. 147 TIOPA 10 contains the core transfer pricing rule – the arm’s length principle. It requires an adjustment to profits or losses of an entity where the imposition of an ‘actual provision’ between it and a connected person confers a potential tax advantage when compared with the ‘arm’s length provision’.

In essence, the actual provision is the actual conditions of a transaction or series of transactions agreed between the 2 parties, and the arm’s length provision is those conditions which would have been agreed between independent persons.

Though UK legislation does not define the core concept underpinning transfer pricing – the arm’s length principle – it does provide a domestic framework for its application. The aim of this framework is to apply the arm’s length principle in a manner which best ensures consistency with the OECD Transfer Pricing Guidelines, while balancing UK domestic interests.

There are 3 key concepts within this framework which provide the skeleton of UK transfer pricing which are under review:

• the ‘provision’
• the definition of connectedness (the ‘participation condition’)
• the tax advantage rule (the ‘one-way street’)

The provision

Taking these in turn, the ‘provision’ concerns the economic relationship between 2 parties against which the arm’s length principle is applied. Part 4 compares the ‘actual provision’ made or imposed between 2 persons to the ‘arm’s length provision’. Article 9 of the OECD Model does not use the term ‘provision’ but instead compares the ‘conditions’ made or imposed between 2 enterprises with those which would be made between independent enterprises.

‘Provision’ is not otherwise defined in the legislation. However, and in particular, it might be interpreted as narrower in scope than the OECD’s phrase ‘conditions made or imposed between the 2 persons in their commercial or financial relations’, which suggests a broader grouping of relations between 2 enterprises – subject to the discussion of separate and combined transactions, and ‘intentional set-offs’ at 3.9 et seq. of the OECD Transfer Pricing Guidelines. Because the potential tax advantage rule at s. 155 operates at the level of the provision, the scope of provision can have a material impact on which transactions between entities can be offset against one another when establishing the extent to which the profits derived from the actual and arm’s length provisions differ. How restrictive an interpretation one takes of ‘provision’ can alter the amount of tax payable.

S. 164 TIOPA 10 requires that Part 4 be read in such a manner as best secures consistency between s. 147 (and other sections) and Article 9 of the OECD Model as further interpreted by the OECD Transfer Pricing Guidelines. This ensures, as far as is possible, that UK domestic law is interpreted consistently with treaties.

HMRC guidance at INTM412050 states that ‘provision’ should be interpreted broadly consistently with ‘conditions’ in Article 9; however, relying on s. 164 to align plainly different terminology with different common uses creates unnecessary friction.

The government is considering amending s. 147 to better replicate the language of Article 9(1) of the OECD Model.

Question 1: The government welcomes respondents’ views on the term ‘provision’ within s. 147 TIOPA 10. Specifically, is this term commonly understood, does it provide anything more than ‘conditions’ per Article 9 of the OECD Model, and do respondents encounter any practical difficulties which result from the difference in terminology between UK domestic law and double taxation treaties?

The participation condition

The ‘participation condition’ is part of the basic pre-condition which must be met before a transfer pricing adjustment is triggered by Part 4. Because transfer pricing applies to transactions between connected persons, it is prima facie necessary to define the phrase in order to determine who and what should be within scope.

A person is treated as connected to another for the purposes of that Part if one participates directly or indirectly in the other’s management, control or capital, or if they are both subject to direct or to indirect participation from a third person(s). Control is not defined in Part 4, and instead the general definition at s. 1124 Corporation Tax Act 2010 (CTA 10) is adopted via s. 217(1) TIOPA 10.

Broadly, control is defined as the ability to secure that the affairs of the controlled person are conducted in accordance with the controlling person’s interests, by means of shareholding, voting power or other powers conferred by the articles of association or other document regulating that or any other body corporate.

Because of the definition of control at s. 1124, the current definition of the participation condition fails to explicitly catch some circumstances where parties are subject to the excessive influence of another which doesn’t fall within the definition at s. 1124, for example, a major creditor.

Such influence may, in some cases, cause the price of a provision to differ from that which would otherwise have been agreed, to the detriment of the Exchequer where that difference confers a tax advantage. Of course, whether it does or not will be a question of fact, to be answered with reference to the specific circumstances of a given case.

The current rules defining ‘indirect participation’ are also complex. The various conditions at ss. 158–163 were included to catch specific scenarios which could be instead caught by a broader definition of the principal rule.

Indirect control will arise in any of the following scenarios:

• where a person would have direct control if certain additional rights and powers were attributed to that person, including rights and powers of connected persons, and future rights and powers
• where a person is a 40 % participant in a joint venture and there is one other participant who holds at least 40 % of the venture
• where a person acts together with other persons in relation to a financing arrangement, and that person would have direct control if the rights and powers of those other persons were attributed to it

HMRC has analysed other approaches to the definition of connectedness in treaty partner jurisdictions. Types of approaches can generally be categorised as exhaustive and non-exhaustive list-based approaches: some jurisdictions, such as India, provide a comprehensive list of all scenarios which engage their transfer pricing rules; whilst others provide a less prescriptive definition, which in theory applies to any circumstance where one party is able to exert a controlling influence over the other, whether formal or informal.

The US, for example, in addition to testing direct or indirect control, considers whether taxpayers are ‘acting in concert’, which depends on the factual circumstances of the arrangement. Norway requires a ‘community of interest’ to engage their transfer pricing rules, which is to be assessed on a case-by-case basis and considers whether either party is dependent on, or under the influence of, the other. Other jurisdictions apply a more flexible test of connectedness, including the Netherlands and Italy.

A third approach is that of Switzerland, which does not have a special definition of connectedness, but simply asks whether the tested transaction occurred only because of the relationship between the parties ^{[footnote 2]}.

The benefits of a less prescriptive definition similar to those used in the US and Norway is that it ensures that transfer pricing can apply in any situation where control distorts the commercial and economic realities of a transaction.

The benefit of the alternative – a narrow and exhaustive list – is that it arguably provides greater certainty, though, in so doing, it inevitably misses some controlled transactions (which in some cases are then in turn put forward as, themselves, ‘arm’s length’ comparators to support the pricing of other transactions).

The Swiss approach avoids the duplication between a participation condition and the substantive application of the arm’s length principle. In theory, the key question for transfer pricing purposes is not whether persons are related, but whether the conditions agreed between them are distorted because of that special relationship.

However, a rule of this type has, at its extremes, the potential to apply transfer pricing compliance obligations to all transactions unless further refined in supplementary guidance. It also widens disputes to the reason for mispricing – for example, whether it is mispriced because of the special relationship or some other reason.

The government is considering whether to consolidate the participation condition, whilst ensuring transfer pricing can apply to all instances of mispricing which arise as a result of the special relationship between the parties. Any amendment to the participation condition must balance clarity, certainty and effectiveness.

One option is to remove the participation condition altogether, requiring a transfer pricing adjustment whenever a provision has been mispriced due to a special relationship. Another is to retain a more general participation condition which asks whether excessive influence or control is exerted by one party over another, or on both by a third. Both options could be further refined in guidance.

It is not the government’s intention to extend the scope of transfer pricing compliance obligations to all transactions regardless of their prima facie commerciality. Whichever option is selected, it will need to ensure that some distinction is made between transactions most at risk of non-arm’s length pricing, and those which are obviously arm’s length.

Question 2: The government welcomes respondents’ views on the participation condition, and experiences of the application of other jurisdictions’ laws in that regard.

The tax advantage rule (one way street)

Part 4 does not require the unrestricted application of the arm’s length principle in all cases. The ‘one-way street’ is an intentional disapplication which prevents unilateral negative adjustments to profits or losses which would otherwise give rise to non-taxation where a corresponding adjustment is not made in the tax computation of the counterparty to the provision.

The ‘one-way street’ currently operates (1) at the level of a provision (which must be between 2 persons), and (2) on a chargeable period by chargeable period basis. There is good reason for these restrictions – they ensure that negative adjustments to profit necessarily only follow corresponding positive adjustments (either in another jurisdiction followed by mutual agreement procedure or in another UK entity followed by a valid compensation adjustment claim under s. 174 TIOPA 10 et seq).

For example, a UK company is party to 2 provisions, provision one with Company A in jurisdiction A, and provision 2 with Company B in jurisdiction B. The UK has a treaty, containing Article 9 with jurisdiction A, but not with jurisdiction B. It is established that actual provision one confers a tax advantage of 100, and actual provision 2 confers a tax disadvantage of 50.

Part 4 imposes, for UK tax purposes, the arm’s length provision instead of the actual provision one, resulting in an increase of taxable profits of 100. The taxpayer is then entitled to submit a mutual agreement procedure claim to HMRC or the tax authority of jurisdiction A which, if the subsequent mutual agreement procedure is successful, will result in HMRC and/or jurisdiction A providing relief from double taxation.

There is no adjustment to provision 2 as there is no tax advantage conferred by its imposition. This is despite the fact that, overall, the UK company is advantaged. Were a negative adjustment to be permitted in relation to provision 2, this would risk non-taxation as there is no guarantee that jurisdiction B will audit the counterparty and assess a corresponding amount to tax. Furthermore, as there is no treaty with jurisdiction B, no mutual agreement procedure claim would be available.

Likewise, the chargeable period by chargeable period application ensures that amounts are not left out of tax altogether. This is particularly important due to the annual approach to taxation.

If, for example, provision one confers tax advantages in years 1, 3 and 4, but a tax disadvantage in year 2, there would be a risk of non-taxation if the UK were to permit a unilateral negative adjustment in year 2 (even if that adjustment was netted off in full by positive adjustments in other years).

Jurisdiction A might make an assessment in year 2, or it may not – for example, it might be out of time under domestic rules to do so. Of course, if it did, a mutual agreement procedure claim could be made.

This is not to say that under-reward in one year can never be set off against over reward in another. Evidence of comparable arrangements might show, for example, that arm’s length parties set terms between one another in comparable commercial arrangements which include a mechanism to adjust reward in later years to take account of under-reward in earlier ones. In such cases, it may be appropriate to adopt that pricing in the tested transactions – assuming the principles of Chapter III of the OECD Transfer Pricing Guidelines are respected.

The government is aware that the importance and proper application of the one-way street is not fully understood by taxpayers. By aligning the wording of s. 147 with that used in Article 9 of the OECD Model, some potential ambiguity in its application will be removed; however further guidance may also be helpful in making the scope and application of the ‘one-way street’ as clear as possible.

Therefore, in addition to the aforementioned changes to the language of Part 4 and the changes to the ‘one-way street’ discussed below in relation to UK:UK transfer pricing, the government also intends to clarify the general purpose and application of the ‘one-way street’ via guidance.

Question 3: The government welcomes respondents’ views on the ‘one-way street’: how frequently do tax disadvantages arise, and do taxpayers commonly amend underlying contracts to avoid the unfavourable outcomes? Is the purpose of the ‘one-way street’ fully understood and how does it compare with comparable rules in other jurisdictions? How does the ‘one-way street’ factor in commercial decision making (if at all)?

3.3. UK:UK transfer pricing

In addition to these 3 concepts, there are other aspects of Part 4 which the government is considering. The first is the current requirement to apply transfer pricing to domestic transactions irrespective of the overall impact on the UK tax base.

Transfer pricing inaccuracies most commonly depress the UK tax base where the counterparty to a provision is tax resident outside of the UK. There can, however, be instances where wholly domestic mispricing between UK entities gives rise to an overall tax advantage. Such an advantage might occur where companies are subject to a different effective rate of tax – either because one is subject to IT and the other, CT, or because a special regime applies (for example, the banking surcharge, the oil and gas ringfence, or the patent box regime).

Advantages may also arise where mispricing accelerates the timing of utilisation of losses by artificially locating profits in an entity with brought forward losses (subject to the application of the Corporate Loss Restriction rules).

Currently, Part 4 makes no distinction between domestic and cross-border transactions: it applies to provisions between UK entities (UK:UK transfer pricing) as well as to cross-border provisions. This means that a transfer pricing compliance obligation is placed on all wholly domestic transactions, even those which don’t result in an overall reduction of the UK tax base.

Domestic transfer pricing is not universally adopted. Japan, for example, limits transfer pricing to ‘foreign related transactions’ between Japanese and foreign entities. The justification for excluding domestic transactions would be that it reduces the burden on businesses without depressing the tax base.

The government is considering how and whether to relax the general requirement to apply UK:UK transfer pricing to reduce the compliance burden on businesses without creating opportunities for arbitrage. Any revision will likely need to be limited by an exception to cover scenarios in which the mispricing has a detrimental UK tax impact to ensure that opportunities for manipulation aren’t created. Such an exception could either be a general rule or a list of specific circumstances.

A general exception might be given effect by amending the ‘one-way street’ at s. 155 TIOPA 10 so that s. 147 engages to require an adjustment where the difference between the actual and arm’s length provisions confers an overall UK tax advantage (whether in quantum or timing).

This would differ from the current rule, which applies the tax advantage test at the entity level. Such a rule might be designed so that it engages transfer pricing rules in relation to cross border provisions (where the UK does not tax the counterparty) and those wholly domestic arrangements which have a detrimental effect on the UK tax base.

It would exclude UK ‘tax neutral’ mispricing which results in no reduction of UK tax. The benefit of such a rule is that it is theoretically simple, though it would put the onus on the taxpayer to determine whether the circumstances of a provision give rise to an overall reduction of tax.

One approach might involve a general exemption to transfer pricing where both affected persons are subject to UK CT or IT with a list of specific exceptions where domestic transfer pricing is required.

Specific exceptions provide greater certainty, but would require extensive supplementary provisions to ensure every scenario was explicitly provided for, and have the potential to become outdated with every subsequent change of UK tax law.

Question 4: The government requests respondents’ views on UK:UK transfer pricing. Is it onerous and to what extent, and would providing a general exemption materially reduce the compliance burden? Do respondents have any views on the practical application of a general vs specific exception to the general exemption?

3.4. Governance

Special operational rules are provided at ss. 208–211 TIOPA 10. The purpose of these rules is to ensure transfer pricing determinations (such as closure notices or discovery assessments) are consistent with HMRC policy and understanding of the law.

The rule requires that a ‘Commissioners’ Sanction’ is sought before any determination is issued. The power to sanction is delegated and the process is overseen by HMRC’s transfer pricing policy team in Business, Assets and International directorate (BAI).

Not all conclusions to enquiries require a sanction: firstly, settlements which are concluded by contract do not qualify as ‘determinations’ for the purpose of s. 208(3); and, secondly, s. 209 provides an exemption to the general requirement at s. 208 where HMRC and the taxpayer reach ‘an agreement’ which is in force at the relevant time. S. 209 in practice might be ambiguous as it doesn’t further define agreement for these purposes. It also does not itself make the agreement binding, or require it to be legally enforceable.

An important feature of HMRC’s operational approach to transfer pricing is the transfer pricing governance framework which aims to ensure that enquiries are concluded on a principled and consistent basis, in accordance with the Litigation and Settlement Strategy (LSS).

This framework, including the LSS, has been developed and applied since 2007, and therefore post-dates the last major changes to the UK’s transfer pricing legislation. Depending on the tax at stake in an enquiry, sequential governance obligations are mandated, including approval by the Commissioners themselves in the highest value cases.

In practice, therefore, the legislative requirement for a Commissioners’ Sanction provides relatively little benefit over and above governance frameworks designed for the same purpose.

The government is therefore considering whether to repeal ss. 208–211 of TIOPA 10, and rely on existing (or modified) governance frameworks to ensure consistency, or introduce a system where taxpayers can request that a charge is reviewed by a Designated Officer of HMRC.

Question 5: The government welcomes respondents’ views on Commissioners’ Sanctions. Do they provide assurance and are they valued by taxpayers?

3.5. Financial transactions transfer pricing

The transfer pricing legislation in Part 4 TIOPA 10 contains a number of specific sections in relation to transfer pricing of financial transactions. In broad summary, the sections within Part 4 which deal with financial transactions provide that, where the actual provision ‘relates to a security’:

• when deciding whether the arm’s length provision differs from the actual provision (s. 152(2)) account should be taken of all factors, including whether the loan would have been made at all in the absence of the special relationship, whether it would have been made in a lower amount, and what terms it would carry

• guarantees from companies with which the borrower has a participatory relationship must be disregarded in determining the above factors (s. 152 – s. 154)

• if disregarding guarantees reduces the amounts that a UK borrower can deduct in respect of interest or other amounts payable under debt, a UK guarantor of such a debt may claim to be treated for tax purposes as if it had issued the debt (and made any payments) itself. This secures a tax deduction in respect of such payments to the extent of its own capacity (s. 191 – s. 194)

These rules were influenced by a desire to ensure compliance with EU law. They replaced existing rules contained at s. 209 ICTA which permitted account to be taken of ‘relationships, arrangements or connections (whether formal or informal)’ between the borrower and a company within the same ‘UK Grouping’ – broadly, a notional UK subgroup of 51% subsidiaries of which the borrower is part.

The rules requiring the disregard of the effects of a guarantee from a related party were intended to prevent a UK entity being excessively leveraged above the amount of debt it would have been able to obtain at arm’s length. Ss. 191–194 were introduced to permit a compensating adjustment in thickly capitalised UK entities which could be said to be ‘guaranteeing’ the debt.

The definition of a ‘guarantee’ for these purposes is widely defined at s. 154, and includes not only formal sureties, but relationships, arrangements, connections or understandings, whether formal or informal. Some have argued that this extends the definition of a guarantee past its common legal meaning and covers ‘implicit support’ from the wider group of which it is part.

Following the publication of the OECD’s Transfer pricing Guidance on Financial Transactions – which was subsequently adopted into the 2022 guidelines within a new Chapter X and so into s. 164 TIOPA 10 by SI 2022/1147 – there is now specific OECD-level guidance which overlaps with the special provisions in domestic law instructing how the arm’s length principle should be applied.

There is potential for disagreement between HMRC and taxpayers over whether ss. 152–154 permit account to be taken of a borrower’s membership of a corporate group (‘implicit support’) in determining the amount of debt it is able to borrow at arm’s length and the terms of such debt, including the interest payable thereon (the principles outlined at paragraph 10.76 onwards of the Transfer Pricing Guidelines).

Moreover, ss. 152–154 contain conceptual difficulties, such as a requirement at s. 153(2)(b) to consider the price of a guarantee at arm’s length, whilst at s. 153(5) requiring that the beneficial effects of a guarantee are ignored. They also specifically only catch one particular circumstance where interest might be inflated (the provision of guarantees) and don’t deal with other scenarios which extend the financial capacity of an entity above that which it would enjoy at arm’s length

The government is considering whether amendments should be made to Part 4 TIOPA 10 to ensure consistency, to simplify its operation, and to better ensure its intended outcomes are realised. In order to achieve this goal, the government is considering whether to repeal ss. 152 to 154 and 191 to 194 TIOPA 10 and replace them with new provisions.

The core aims would be to:

• permit account to be taken of implicit support, to the extent relevant, when determining the amount and terms of debt available at arm’s length

• permit guarantees that reduce the arm’s length cost of borrowing to be taken into account when determining the terms of debt available at arm’s length, and therefore facilitate the pricing of such guarantees where appropriate

• retain any intended benefits of the current rules, such as the extent to which they prevent the erosion of the UK tax base through over-capitalisation due to guarantees which inflate borrowing capacity above what it would be at arm’s length

• provide a clearer and more certain alternative to the current compensating adjustment mechanism at ss. 191–194 to enable excess capacity in other UK entities to be utilised

In relation to retaining benefits and improving clarity, the effect of ss. 152–154 and 191–194 is consistent with the Transfer Pricing Guidelines. The current legislation does not permit borrowing capacity to be increased by a guarantee from a connected company. However, it does permit the guarantor to make a compensating adjustment claim in respect of interest debits that have been disallowed as a result of disregarding the guarantee.

This approach is echoed by paragraph 10.161 TPG 2022, which raises the issue of whether guaranteed debt should be accurately delineated as a loan from the lender to the guarantor:

10.161. Where the effect of a guarantee is to permit a borrower to borrow a greater amount of debt than it could in the absence of the guarantee, the guarantee is not simply supporting the credit rating of the borrower but could be acting both to increase the borrowing capacity and to reduce the interest rate on any existing borrowing capacity of the borrower. In such a situation there may be 2 issues – whether a portion of the loan from the lender to the borrower is accurately delineated as a loan from the lender to the guarantor (followed by an equity contribution from the guarantor to the borrower), and whether the guarantee fee paid with respect to the portion of the loan that is respected as a loan from the lender to the borrower is arm’s length. The conclusion of an analysis of such transactions may be, taking into account the full facts and circumstances, that the evaluation of the guarantee fee should be limited to a fee on the portion that has been accurately delineated as a loan, and the remainder of the loan granted should be regarded as effectively a loan to the guarantor followed by an equity contribution by the guarantor to the borrower.

One option which could achieve these stated aims is to replace ss. 152–154 and 191–194 with similarly structured rules, though ones designed to more clearly permit the effects of implicit support and avoid some of the other problems of the current drafting. The intent of such a rule would be to continue to deny the effects of an intragroup guarantee on borrowing capacity, whilst permitting a corresponding adjustment to bring debits on disallowed debt into another entity subject to UK tax to the extent of its excess borrowing capacity.

Question 6: The government welcomes the views of respondents on the repeal of ss. 152 to 154 and 191 to 194 TIOPA 10 and their replacement by a more directly drafted rule. Specifically, what practical issues does the current legislation present, and what benefits should be retained? Are there any alternative options which respondents see which would achieve the aims as stated above?

3.6. Interaction of Part 4 TIOPA 10 and other legislation

The nature of transfer pricing is such that it necessarily affects the application of other tax rules. This is due to its fundamental nature: it imposes a fiction – the arm’s length provision – which feeds into the tax computation. Part 4 is not itself a charging provision, but rather it relies on other provisions such as Part 3 (trading income), Part 5 (non-trading loan relationships) and Part 8 (intangible assets) of CTA 09 to determine the ultimate charge to tax.

Where Part 4 is engaged, the profits or losses of an enterprise are calculated for tax purposes as if the arm’s length provision, rather than the actual provision, was made. The government is considering whether the manner in which this hypothesis takes effect would benefit from clarification.

Question 7: The government welcomes views on the clarity or otherwise of the resultant impact on the application of other rules. Are there any specific interactions which cause difficulties?

There are potential complexities where Part 4 itself, transfer pricing, or the arm’s length principle are referenced in other legislation. Some specific areas where it may be helpful to review this further are considered below.

3.7. Transfer pricing and valuation methodologies

The rules at Part 8 CTA 09 set out how a company’s gains and losses in respect of intangible fixed assets are calculated and brought into account for CT purposes. Chapter 13 of that Part provides rules in relation to transactions between related parties. S. 846 deals with transactions that are also within the scope of Part 4 of TIOPA 10 (transactions not at arm’s length).

The interaction between Part 8’s market value rule and Part 4 of TIOPA 10 are potentially complex, though in essence they calculate the value of intangibles based on the market value, the arm’s length price, or both depending on the circumstances.

S. 846(1B) for example, brings in an additional amount, in excess of the arm’s length price, where market value is greater. Ss. 849AB–AD require similar adjustments for the grant of licences between grantors and grantees.

These rules are potentially burdensome for both HMRC and taxpayers, as they require multiple valuations. Moreover, where market value is used, they can produce a different outcome to the treaty, which will be based on arm’s length price.

Though based on similar principles, the market value of an asset can, in some circumstances, differ from its arm’s length price. This is due to differences between the 2 standards themselves – the main difference being that market value assumes a hypothetical, willing buyer and seller, whereas the arm’s length principle takes account of specific characteristics of the actual buyer and seller in the transaction. For example, the buyer may be able to exploit certain synergies between an acquired intangible asset and assets it already owns such that they could be prepared to pay more than its market value.

In order to both simplify Part 8 and to better align its outcome with treaties, the government is considering amending the rules in Chapter 13 to require the application of the arm’s length principle to determine the value of the intangible asset in transactions between related parties in cases where Part 4 TIOPA 10 is in scope.

A move to the arm’s length principle as the single valuation standard would enable such transactions to enter the Advance Pricing Agreement programme where normal APA criteria met. An APA can only determine questions under Part 4 of TIOPA 10, so it cannot agree the market value of a particular asset.

This makes it very difficult under current law to achieve tax certainty in respect of these transactions. In making these changes, the government would be mindful of a risk of arbitrage risks arising from the differing valuation standards.

Question 8: The government welcomes respondents’ views on the current formulation of the rules at Part 8 CTA 09 which govern the taxation of intangibles transactions between related parties and the proposal to simplify ss. 846 and 849 CTA 09.

Question 9: Would a move towards a single valuation standard in cases where transfer pricing otherwise applies reduce compliance burdens?

Question 10: Do respondents foresee any problems having different valuation standards for those subject to transfer pricing and those not subject to transfer pricing (such as many SMEs); or for different transactions – such as, capital transactions (which are subject to MV rules) and transactions in intangibles?

Question 11: The government also welcomes respondents’ views on whether other UK tax rules which impose an obligation to undertake multiple separate valuation standards are burdensome in practice.

3.8. Loan relationships and related issues

The rules governing the taxation of non-trading loan relationships which result from transactions not at arm’s length are set out at ss. 444–446A CTA 09.

S. 444 CTA 09 requires that, where a related transaction involving a loan relationship (any disposal or acquisition of rights or liabilities under the loan) is not at arm’s length, the credits, or debits to be brought into account for tax purposes are those which would have arisen under the ‘independent terms assumption’. Unlike Part 4 TIOPA 10, there is no necessary linkage between the independent terms assumption and the OECD Transfer Pricing Guidelines.

However, in effect it is seeking to do the same thing – to align taxable income and expenses with those which would have arisen between parties dealing at arm’s length. The general rule at s. 444 is then disapplied by s. 445 in cases where Part 4 ‘applies’ – where either credits or debits fall to be adjusted for tax purposes under that Part, or are within that Part without falling to be so adjusted (because the actual provision does not differ from the arm’s length provision).

S. 446 sets out how adjustments made under Part 4 are brought into account.

S. 446A deals with ‘non-market loans.’ It sets out the rule to prevent companies in certain cases obtaining a deduction for notional financing costs which could otherwise arise under IFRS and New UK GAAP. In particular, this typically arises due to the accountancy requirement to measure loans on inception at their present value or fair value.

The derivative contract regime at Part 7 of CTA 09 contains a similar rule to s. 446 at s. 693. This brings into account adjustments to derivative contracts and related transactions made under Part 4 TIOPA 10.

The government is considering whether the very complex rules governing the taxation of loan relationships and derivative contracts which result from transactions not at arm’s length can be reduced and simplified.

Question 12: The government welcomes views from respondents on whether there are any concerns in relation to these rules – whether they are understood, whether they adequately achieve their desired function, and whether any practical difficulties in application exist.

The rules governing how foreign exchange movements are calculated in respect of transactions not at arm’s length have changed over time.

Prior to 2002, the transfer pricing rules did not affect the calculation of exchange gains and losses; legislation explicitly disapplied transfer pricing in relation to exchange movements on financial instruments. Instead, ss. 136 to 138 FA 93 provided for the ring fencing of exchange losses on a loan or forward currency contract which was entered into otherwise than on arm’s length terms. Such losses were only available for relief against future exchange gains arising on the same loan or contract.

From 2002 onwards, the treatment of exchange gains and losses was linked to the transfer pricing rules by ss. 447 and 694 of CTA 09, which apply transfer pricing rules indirectly.

However, where the transfer pricing rules are engaged in certain specified ways to impose the arm’s length provision, then the exchange gains and losses are calculated based on that arm’s length provision. As a result, adjustments to exchange movements can be made where Part 4 TIOPA 10 requires the amount of the financial instrument to be reduced.

The effect of ss. 447 and 694 is largely the same as applying transfer pricing to determine directly the amount of any exchange gain or loss arising from a financial instrument. In particular, it is apparent that the effect of ss. 447 and 694 on the calculation of exchange gains and losses is taken into account in determining whether there is a potential UK tax advantage from the instrument in question.

Separately, ss. 446(8) and 693(6) were introduced in 2016. These apply, for example, to treat certain exchange gains as not taxable where they represent the reversal of exchange losses in previous years that have been disallowed under the transfer pricing rules. The overall effect, therefore, is now similar to the position under the pre-2002 rules.

However, dealing with exchange movements outside of Part 4 introduces complexity and the current terminology of these provisions does not deal with the full range of possible effects of financial transfer pricing, particularly since the publication of additional guidance in Chapter X of the OECD Guidelines. Specifically, these provisions do not require tax adjustments to foreign exchange movements which result from a change in relation to ‘the rate of interest and other terms which would have been agreed in the absence of the special relationship’ (s. 152(2)(c)). This is inconsistent with the principles of transfer pricing.

The current rules include specific provisions designed to ensure that entities which have no overall foreign exchange exposure do not obtain an exposure from the imposition of the arm’s length provision. This serves a clear purpose, and changes to the law will need to be made in such a way that retains this effect – either via the operation of transfer pricing itself, or by the retention of specific rules to that end.

Question 13: The government welcomes views on the tax treatment of adjustments to foreign exchange movements gains and losses which arise following the application of Part 4.

4. Permanent establishments

4.1. Current practice and reasons for proposed reform

The UK is a leading OECD Member country and supports the OECD Model including the commentary. Most of the UK’s double taxation treaties follow a similar structure and include 2 Articles of particular relevance to cross-border trading:

• Article 5 deals with the concept and definition of a PE, which is where an enterprise of one State carries on its business in another State

• Article 7, the ‘Business Profits Article’, then sets out a basis for attributing an appropriate amount of profits to such a PE

UK domestic legislation currently contains rules, originally drafted in 2003, which were intended to reflect the PE principles in the OECD Model. Specific treaties may contain rules which don’t entirely align with the UK domestic legislation. Section 6 of the TIOPA 10 ensures that, where a double taxation treaty is in place, the treaty position takes precedence.

The government is not considering any significant change to the rules governing foreign PEs, which are dealt with at sections 42 et seq. of TIOPA 10. These rules directly cite the relevant treaty and therefore avoid many of the issues discussed in this consultation.

Closer alignment of the UK’s domestic rules with OECD principles may enable subsequent changes to be more quickly incorporated into UK law.

4.2. UK PE legislation

Section 5(2)(b) CTA 09 states that a non-UK resident company is within the charge to CT on income if ‘it carries on a trade in the United Kingdom (other than a trade of dealing in or developing UK land) through a permanent establishment in the United Kingdom’.

Sections 1141-1153 CTA 10 contain the legislative definitions, exceptions and exemptions for both fixed place of business and dependent agent PEs. This legislation is the UK domestic law interpretation of Article 5 of the OECD Model as it stood prior to the 2017 OECD Model (and which had been unchanged since the first OECD Model and Commentary dating from 1977).

Part 2, Chapter 4 of CTA 09 (sections 19-32) sets out the profits chargeable on non-UK resident companies. This was intended to reflect the principles in Article 7 of the OECD Model and includes the concept of the ‘separate enterprise principle’. The legislation reflects the position at the point of drafting but there have been several key changes to the OECD position on profit attribution since.

4.3. Issues

The UK legislation on PE was first introduced in 2003 and, although it has been rewritten into later statute, the wording has remained largely the same throughout. Since 2003, there have been a number of key developments in the international taxation landscape which have affected both the definition of a PE and the principles behind the attribution of profits to a PE.

The OECD Model was comprehensively updated in 2017 following the outcomes of the BEPS project. Changes to Article 5 sought to address particular forms of tax avoidance by multinational enterprises exploiting gaps and mismatches between different countries’ tax systems.

The BEPS Multilateral Instrument (MLI) introduced new optional changes to Article 5 which later formed the basis of the 2017 revision of the OECD Model. The UK chose not to adopt the optional provisions concerning PE thresholds, in common with many other OECD Member countries, and therefore UK treaties were not modified by the MLI to give effect to those changes. New treaties negotiated by the UK since 2017 have not adopted those provisions either.

With regard to attribution of profits, the UK legislation pre-dates the 2008 publication of the OECD Report on the Attribution of Profits to Permanent Establishments, more commonly referred to as the Authorised OECD Approach or ‘AOA’. The OECD Report provides far greater detail on principles of attribution and also pre-dates several changes to the wording of Article 7 in the OECD Model.

These changes in the OECD material which underlies the UK domestic legislation mean that the current legislative wording is no longer as clear as when it was first introduced, which increases uncertainty for taxpayers.

The government is considering whether, and how, to update UK domestic legislation on PEs to maximise clarity and maintain alignment with bilateral treaties and the OECD Model as they develop further. The government believes that improvement in this area could deliver a simplified regime for multinational businesses, increasing tax certainty for non-resident entities trading in the UK.

The government continues to work cooperatively with other jurisdictions via the OECD Inclusive Framework to counter tax avoidance and evasion. The 2017 OECD Model reflects the considered collective view of OECD Member countries’ governments in relation to cross border taxation issues such as the taxation of PEs.

However, UK tax treaty policy has maintained the pre-2017 version of the PE rules, which best reflects our domestic legislation. Given the UK’s broad alignment with the OECD Model, both in domestic law and in UK treaty policy, and contribution to its formulation, the government is considering adopting the 2017 version as the UK’s preferred approach in tax treaties. This would improve certainty, and enable a more flexible approach in treaty negotiations.

In particular, the effect of this change would be to expand the term ‘dependent agent’ to:

• include a person who ’habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without modification by the enterprise…’

• exclude an independent agent who ’acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related’

4.4. Options

The government is considering whether to amend the existing PE definitions and profit attribution rules at sections 1141–1151 CTA 10 and Chapter 4 CTA 09, respectively. The government welcomes respondents’ views on how the rules might be amended to better align with treaties and the OECD Model, and has identified 2 potential options:

• option a: to define a UK PE and attribute profits by direct reference in legislation to the PE and Business Profits Articles (usually Articles 5 and 7) in the relevant double taxation treaty, subject to certain restrictions such as not creating service or insurance PEs, which are not a feature of the OECD Model, where the treaty contains such features. Where no treaty is in place, Articles 5 and 7 of the 2017 OECD Model could be used

• option b: to define a UK PE by reference to the current OECD Model, which would be subject to the relevant treaty

The advantage of option a) is that it best ensures alignment (in relation to fixed place of business and dependent agent PEs) between the domestic charge and the treaty outcome, therefore providing certainty to both businesses and the exchequer.

The advantage of option b) is that it best aligns the UK domestic charge with the international consensus, in relation to the types of PE which exist in the OECD Model whilst ensuring that this is subject to the terms of the particular treaty in relation to those types of PE reducing complexity for businesses.

A secondary question should option b) be preferred is whether to explicitly copy into UK law the definition of PE and the rules governing attribution as contained in Articles 5 and 7 of the OECD Model – risking those rules becoming themselves outdated with later versions of the OECD Model – or whether to refer directly to the OECD Model itself via a provision such as s. 164 TIOPA 10 ^{[footnote 3]}. This reference could be duplicated for the purposes of outbound PE exemption in s. 18S CTA 09 for the purposes of Chapter 3A of Part 2 CTA 09.

Question 14: The government welcomes general observations from respondents regarding the perceived advantages and disadvantages of each option for amending the PE definition.

With regards to the definition of a PE, if option a) were selected, it would be necessary to consider whether to limit the possible definitions of a UK PE to the definitions of fixed place of business or dependent agent PEs in the relevant Article, in alignment with the UK’s general policy position on the definition of PEs.

Question 15: Do respondents foresee any issues with the UK limiting this definition to fixed place of business and dependent agent PEs?

Under option a) in relation to non-treaty cases, and option b), the definition of PE would substantially align with that of the OECD Model. There are 2 paragraphs of the OECD Model which would therefore result in changes to the current domestic definition:

• in relation to the definition of ’dependent agent‘ (Article 5(5))
• in relation to the exception for ’independent agents‘ (Article 5(6))

These changes will therefore, for the first time, bring into UK charge PEs covered by the amended 2017 wording to paragraphs 5 and 6 of Article 5, which the UK did not previously adopt.

Question 16: Do respondents foresee any specific issues with the UK changing its domestic law position in terms of the definition of a dependent agent PE? Do respondents foresee any specific issues with the UK changing its domestic law position in terms of the definition of an independent agent?

Question 17: Do respondents foresee any issue with the UK potentially changing its negotiating position, so that UK tax treaties might include these provisions?

Similar to the approach to the PE definition, PE attribution rules would either be determined by the terms of Article 7 (or the equivalent Business Profits Article) in the relevant double taxation treaty or to Article 7 of the OECD Model depending on the option preferred and the existence or otherwise of a specific treaty. This will replace the detailed attribution rules currently set out in Chapter 4 CTA 09.

Question 18: Do respondents foresee any issues with the UK aligning the domestic legislation on PE attribution either directly with the relevant double taxation treaty or with Article 7 of the OECD Model supported by the Commentary and the OECD Report on the Attribution of Profits to PEs?

Question 19: Would removing any particular aspects of the legislation in Chapter 4 CTA 09 be problematic? 

Question 20: The government welcomes respondents’ views about possible unforeseen and/or unhelpful consequences or interactions with other parts of UK tax legislation which are not addressed in the above proposals. 

Question 21: The government also welcomes any specific additions, exceptions or exemptions which respondents deem helpful to identify or add in at this stage.

4.5. Sector specific issues

Regardless of which option for reform of the UK domestic law definition of PE is taken forward, it is intended that the broker exemption in s. 1145 CTA 10 and the Investment Manager Exemption (IME) in s. 1146 CTA 10 will be retained.

These exemptions provide certainty that, where certain conditions are met, a UK broker or investment manager will be treated as an agent of independent status. The government will consider whether any consequential amendments to these exemptions are required as a result of reforms contemplated in this consultation, to ensure that they continue to achieve their intended purpose.

The government is aware that some UK investment managers rely on the independent agent exemption within an applicable tax treaty (rather than the IME) to ensure that they do not create a taxable UK PE of the funds they manage or the investors in those funds.

Stakeholders have previously expressed concerns that the new Article 5(5) and 5(6) of the OECD Model could cause uncertainty as to the application of the independent agent exemption to investment managers. The government wishes to understand these concerns, so that it can ensure that if the UK withdraws its reservation against Article 12 MLI, this does not adversely impact the UK asset management sector.

Question 22: The government welcomes comments from respondents on the potential impact of the reforms contemplated in this consultation on the UK asset management sector.

The exemption for Lloyd’s agents will not be retained in UK legislation. Changes to the Lloyd’s residence rules in 2015 mean that all Lloyd’s members must be UK resident for tax purposes. In line with the core aim of simplification, section 1151 will be repealed.

Question 23: Do respondents foresee any issues with the removal of specific independence criteria for Lloyd’s agents (currently at section 1151 CTA 10)?

5. Diverted Profits Tax

5.1. Why is the government considering reforming Diverted Profits Tax?

Diverted Profits Tax was introduced in 2015 to counter the use of contrived and artificial arrangements by multinationals to avoid paying tax on profits that had been generated from economic activity in the UK. The effectiveness of Diverted Profits Tax is a result of several core features, including charging tax at a higher rate (31% from April 2023) with advance payment.

These features help to address the information imbalance that can arise between HMRC and taxpayers, which makes it difficult to resolve enquiries, particularly where taxpayers are non-cooperative. Many taxpayers have chosen to change their behaviour and pay the appropriate amount of CT on their economic activities in the UK rather than pay tax at a higher rate.

As noted, between April 2015 and March 2022, Diverted Profits Tax secured over £8 billion ^{[footnote 4]}, and helped to settle 170 investigations. Independent market research has reported that the majority of businesses involved in a diverted profits enquiry with HMRC did change their UK transfer pricing policies.

It is important that HMRC continues to be able to tackle these types of contrived arrangements. However, there have been various changes in the international tax environment which justify reassessment, including publication of the updated OECD Transfer Pricing Guidelines in 2017 and 2022, and the progress of the BEPS Actions 8–10 work.

As a result, the government is considering whether to integrate Diverted Profits Tax fully into the transfer pricing regime, safeguarding the future of those features which have made it an effective tool to against contrived international tax avoidance arrangements. This should ensure a more certain and stable regime while maintaining the important protection that Diverted Profits Tax provided to counter contrived arrangements.

5.2. Notes on terminology

The Diverted Profits Tax legislation at Part 3 Finance Act 2015 (FA 15) as amended by Finance Acts 2016 (FA 16), 2019 (FA 19) and 2022 (FA 22) targets 2 distinct types of arrangements:

1. the use of entities or transactions lacking economic substance to exploit tax mismatches to divert profits from the UK. Cases featuring these arrangements are referred to as s. 80 or s. 81 cases by reference to the clauses of Part 3 FA 15 which target them

2. the use of contrived arrangements to avoid a UK PE of a foreign trading company to divert profits from the UK. Cases featuring these arrangements are referred to as s. 86 cases by reference to the clause of Part 3 FA 15 which targets them

5.3. Bringing Diverted Profits Tax within Corporation Tax

Central to this reform is the proposal to remove Diverted Profits Tax’s status as a separate tax, bring it into CT retaining the essential features of the existing Diverted Profits Tax framework.

The government considers that the full alignment of diverted profits with CT profits would be a notable simplification of the UK’s tax regime and improve certainty for businesses by making it clearer how diverted profits charges interact with other elements of the CT framework, for example: ensuring that profits are only charged to tax once, subject to one tax geared penalty and that amendments to a taxpayer’s tax return will reduce the amounts subject to a diverted profits charge.

Diverted Profits Tax’s relationship to the UK’s tax treaty network would also be clearer, enabling businesses to benefit from features such as straightforward access to the mutual agreement procedure, further enhancing the UK’s commitment to internationally agreed minimum standards for accepting cases into this process.

Rather than have a separate Diverted Profits Tax, the government would introduce a new assessing power to CT (a diverted profits assessment) that would be available in essentially the same circumstances as those to which a Diverted Profits Tax charging notice applies.

The assessment would apply to profits included within CT profits by virtue of Part 4 TIOPA 10 but omitted from the company’s tax return in circumstances of attempted profit diversion. Consistent with Diverted Profits Tax, this assessment would be at a higher than standard rate of CT and reliefs would not be available except for credit relief under Part 2 TIOPA 10. Customers would be able to claim double taxation relief in the usual way.

The current Diverted Profits Tax rules whereby an amendment to a company’s tax return provides relief against Diverted Profits Tax would continue to apply – an amendment to the company tax return would be possible during the review period and would lead to a corresponding reduction in the diverted profits assessment. Reliefs that were not available against the diverted profits assessment would be available in the normal way in relation to the amended tax return.

Also, reflecting current Diverted Profits Tax rules at s. 101(3)(a), if the tax return is not amended before the end of the review period then relief would be available against the profits charged in the HMRC closure notice, or company tax return that are also included in the diverted profits assessment.

Where a diverted profits assessment is still in charge at the end of the review period and there is an open enquiry, HMRC would be required to issue a closure/ partial closure notice within 30 days of the end of the review period, setting out HMRC’s view of the correct tax charge relating to the matters included in the diverted profits assessment.

This would include any amounts still subject to a diverted profits assessment with the alternate position that such an amount should be charged to CT at the standard rate. This would align the diverted profits investigation and CT enquiry processes more closely and ensure that they are concluded concurrently with a single HMRC position that can be accepted, appealed, or taken into the mutual agreement process.

Question 24: The government welcomes respondents’ views as to whether this closer alignment of a diverted profits charge assessment to the CT enquiry framework would be a welcome simplification. 

The government has considered how best to challenge the arrangements targeted by the current s. 86 legislation in a CT-based regime. HMRC would be able to challenge these arrangements by raising a diverted profits assessment on the UK dependent agent entity to ensure that it is properly rewarded for its activities in the UK, in line with Article 9 of the OECD Model. The government believes that this means that s86 does not require direct replacement.

The government is considering how best to frame the conditions for a diverted profits assessment and whether the concept of a RAP continues to be a useful one in this context.

Question 25: The government invites respondents’ views on bringing Diverted Profits Tax into the CT framework as a standalone CT charge at a higher rate in respect of arrangements designed to inflate expenses, reduce income, or avoid a UK PE.

Question 26: The government welcomes respondents’ views as to whether it would simplify the legislation not to directly replace s. 86 and instead use a diverted profits assessments on UK entities to challenge arrangements which would currently fall under s. 86 and any other comments any other comments in respect of s. 86 and avoided PEs.

5.4. Other proposals

As part of removing Diverted Profits Tax’s status as a separate tax and bringing it into the CT framework, the government intends to take the opportunity to carry out a wider review of Diverted Profits Tax.

The Effective Tax Mismatch Outcome (ETMO) is a mechanical gateway test for the application of Diverted Profits Tax. It has been effective in limiting the application of Diverted Profits Tax to cases where taxpayers have gained a clear tax advantage through contrived arrangements. No wholesale changes to the ETMO are envisaged; however some smaller changes are under consideration.

S. 107 (3)(a)(ii) of the ETMO concerns the testing of a reduction in income in the first party, usually the UK company. This clause has been liable to misinterpretation and while HMRC have tried to address this in guidance, disagreement about scope remains. It is therefore proposed that, s. 107 (3)(a)(ii) would be amended to make unequivocal the fact that a reduction in income refers to a reduction compared to the situation had an alternative provision been in place.

There has also sometimes been a perceived lack of clarity regarding the application of this clause to loss making companies. We would therefore also seek to amend s. 107(3)(a) to make clear prospectively that a diverted profits charge can apply whether the effect of the arrangements in question is to reduce a profit, or increase/ create a loss.

S. 108(2) sets out how we calculate the relevant increase in taxes actually paid by the second party, as amended by the hypotheses at s. 108(2)a)-c), which include the assumption that this relevant increase is in addition to the second party’s other income. This is compared to the UK taxes that would otherwise have been paid by the first party to establish whether there is an ETMO.

This has occasionally caused confusion, so we propose updating the wording to further clarify that the comparison is with the tax actually paid by the second party. This would be subject to a small number of amendments to ensure that we can make a consistent comparison between the 2 parties.

S. 108(7) of the ETMO concerns the definitions of qualifying deductions and qualifying loss reliefs – these are disregarded when calculating the ETMO because they are equivalent to deductions and reliefs available under UK law.

However, where a loss which would typically be qualifying, (such as carried forward loss relief), was created by deductions which would not be qualifying, it is HMRC’s view that the resulting loss should not be treated as qualifying.

It is therefore proposed to make clear that a qualifying loss is only qualifying to the extent that it was created by qualifying deductions.

Question 27: The government welcomes the views of respondents as to whether amending the definition of reduction in income in s. 107(3) FA 15 and changing the definition of ‘qualifying loss relief’ would bring clarity and would welcome any other comments in respect of the functioning of the ETMO.  

The application of Diverted Profits Tax is not limited to profit-making companies if the gateway conditions are met. A loss-making company remains chargeable to CT, and it is possible that taxable diverted profits could arise. Therefore, to have clarity on this point, it is proposed that the calculation provisions (currently ss. 83, 84, 85, 89, 90 and 91) are amended to include an additional subsection to specifically reference loss making companies. A diverted profits assessment would therefore be ring-fenced from losses arising elsewhere.

Question 28: The government welcomes respondents’ views as to whether amending the provisions for the calculation of the taxable diverted profits for would bring clarity on the application of the legislation to loss-making companies. 

The Insufficient Economic Substance Condition (IESC) is the other gateway test in the Diverted Profits Tax regime, testing whether the arrangements in question were designed to secure the tax reduction identified in the ETMO. If the test is not met, or one of the safe harbours applies, then Diverted Profits Tax will not apply. HMRC is considering options to further clarify the scope of the IESC which has been a source of complexity and difficulty in Diverted Profits Tax cases.

We also propose updating the wording to ensure that a diverted profits charge on a UK company can be raised in circumstances where it has entered into arrangements with a foreign entity designed to ensure that the foreign entity is not trading in the UK through a PE.

For the IESC to apply the arrangements must have been designed to secure ‘the tax reduction’. This is defined in the legislation as the reduction in tax that leads to the ETMO. This is also reflected in HMRC’s guidance.

However, it is an area where HMRC continues to receive questions from customers. Therefore, it is proposed that an amendment is made to the legislation to include a specific reference to the ETMO and the government welcomes comments on this proposal.

Question 29: The government welcomes respondents’ views on options to clarify the scope of the IESC and amending the legislative definition of the tax reduction, to improve the functioning of the IESC.

Question 30: The government welcomes respondents’ other comments how to modify the IESC to improve its functioning, and the areas that cause the most complexity.

Currently it is impossible to remove an unpaid Diverted Profits Tax notice, as the Designated Officer is legislatively prohibited from issuing an amending notice to reduce the Diverted Profits Tax charge unless the Diverted Profits Tax has been paid in full as outlined in s. 101(3)(a).

This potentially creates problems in situations such as a liquidation, error or mistake. We are therefore considering amending the legislation to allow an amending notice to be issued even if the diverted profits liability has not been paid in certain clearly defined circumstances.

Question 31: The government welcomes respondents’ views on this change to the circumstances in which an amending notice can be issued and the scenarios where they consider such a policy should apply. 

The RAP is the alternative provision that it is just and reasonable to assume would have been made or imposed, as between the relevant company and any connected companies, instead of the material provision, had tax on income not been a relevant consideration for any person at any time. Changes are required to the meaning and calculation of the RAP, to provide clarification and enable Diverted Profits Tax to be brought into CT.

The material provision in the current legislation must be made or imposed between the 2 parties identified by the legislation by means of a transaction, or series of transactions. The comparison between the RAP and the material provision then helps HMRC to apply the gateway tests for Diverted Profits Tax.

It is an important consideration of moving Diverted Profits Tax into the CT framework that the material provision remains the arrangements entered into by the parties and we propose that the wording for a diverted profits assessment reflects this. These arrangements should then be compared to the arm’s length provision, reflecting the progress that has been made in ensuring that transfer pricing can look at the substance rather than the form of arrangements.

These changes should make it clear that a diverted profits charge will continue to apply in scenarios where the gateway criteria are met and the same underlying transaction would have taken place, although the UK would have received a larger reward or suffered a smaller expense, if the group had not designed the arrangement to divert profits from the UK. It is proposed that the legislation currently at s. 82 should be redrafted to reflect this and that the legislation currently at ss. 83, 84, 85, 89, 90 and 91 should be brought together in a single calculation provision.

Diverted Profits Tax was designed to enable an estimated charge to be issued early in the investigative process, with provision to update the charge during the review period as and when an improved estimate of the tax due becomes possible.

The Inflated Expense Condition (IEC) is a useful tool, based on data modelling, which enables HMRC to issue notices where it has reason to believe that expenses are inflated but doesn’t have sufficient evidence to quantify an appropriate disallowance.

However, use of the condition is not optional and, in some cases where information is available using the IEC can lead to a charge that is known to be excessive. If the actual provision condition is retained, we propose that the wording of the IEC be updated to enable HMRC to override it when better information is available.

Question 32: The government welcomes respondents’ views on amending the definition of the material provision to ensure that it identifies the arrangements actually entered into by the relevant parties and any other comments in respect of the material provision.

Question 33: The government welcomes respondents’ views on amending the definition of the RAP to the arm’s length provision and would welcome any other comments in respect of the RAP.

Question 34: The government welcomes respondents’ views on whether the legislation currently at s. 85 would be sufficient to enable calculation of diverted profits charges in all cases if the RAP is updated as described.

Question 35: The government welcomes respondents’ views on whether (if the actual provision condition is retained) updating the inflated expense condition would improve the operation of the diverted profits regime and would welcome any other comments in respect of the inflated expense condition.

6. Assessment of impacts

6.1. Summary of impacts

Year	2023 to 2024	2024 to 2025	2025 to 2026	2027 to 2028	2028 to 2029
Exchequer impact (£m)	+/-	+/-	+/-	+/-	+/-

Any Exchequer impact will be estimated following consultation, final scope and design of the measure and will be subject to scrutiny by the Office for Budget Responsibility.

Impacts	Comment
Economic impact	The economic impacts will be identified following consultation and final design of the policy.
Impact on individuals, households and families	This measure is not expected to have any impact on individuals. There is expected to be no impact on family formation, stability or breakdown.
Equalities impacts	This measure will only impact larger multinational enterprises, and therefore it is not anticipated that there will be impacts on groups sharing protected characteristics.
Impact on businesses and Civil Society Organisations	This measure is to announce a consultation there are expected to be no impacts at present. Any future impacts will be fully examined and detailed. There is expected to be no impact on civil society organisations.
Impact on HMRC or other public sector delivery organisations	This submission carries no delivery costs to HMRC or other public sector delivery organisations at this stage. We will advise on any future delivery funding requirement depending on the outcome of the consultation.
Other impacts	None identified

7. Summary of consultation questions

Transfer pricing

Question 1: The government welcomes respondents’ views on the term ‘provision’ within s. 147 TIOPA 10. Specifically, is this term commonly understood, does it provide anything more than ‘conditions’ per Article 9 of the OECD Model, and do respondents encounter any practical difficulties which result from the difference in terminology between UK domestic law and the Treaty?

Question 2: The government welcomes respondents’ views on the participation condition, and experiences of the application of other jurisdictions’ laws in that regard.

Question 3: The government welcomes respondents’ views on the ‘one-way street’: how frequently do tax disadvantages arise, and do taxpayers commonly amend underlying contracts to avoid the unfavourable outcomes? Is the purpose of the ‘one-way street’ fully understood and how does it compare with comparable rules in other jurisdictions? How does the ‘one-way street’ factor in commercial decision making (if at all)?

Question 4: The government requests respondents’ views on UK:UK transfer pricing. Is it onerous and to what extent, and would providing a general exemption materially reduce the compliance burden? Do respondents have any views on the practical application of a general vs specific exception to the general exemption?

Question 5: The government welcomes respondents’ views on Commissioners’ Sanctions. Do they provide assurance and are they valued by taxpayers?

Question 6: The government welcomes the views of respondents on the repeal of ss. 152 to 154 and 191 to 194 TIOPA 10 and their replacement by a more directly drafted rule. Specifically, what practical issues does the current legislation present, and what benefits should be retained? Are there any alternative options which respondents see which would achieve the aims as stated above?

Question 7: The government welcomes views on the clarity or otherwise of the resultant impact on the application of other rules. Are there any specific interactions which cause difficulties?

Question 8: The government welcomes respondents’ views on the current formulation of the rules at Part 8 CTA 09 which govern the taxation of intangibles transactions between related parties and the proposal to simplify ss. 846 and 849 CTA 09.

Question 9: Would a move towards a single valuation standard in cases where transfer pricing otherwise applies reduce compliance burdens?

Question 10: Do respondents foresee any problems having different valuation standards for those subject to transfer pricing and those not subject to transfer pricing (such as many SMEs); or for different transactions – such as, capital transactions (which are subject to MV rules) and transactions in intangibles?

Question 11: The government also welcomes respondents’ views on whether other UK tax rules which impose an obligation to undertake multiple separate valuation standards are burdensome in practice.

Question 12: The government welcomes views from respondents on whether there are any concerns in relation to these rules – whether they are understood, whether they adequately achieve their desired function, and whether any practical difficulties in application exist.

Question 13: The government welcomes views on the tax treatment of adjustments to foreign exchange movements gains and losses which arise following the application of Part 4.

Permanent Establishments

Question 14: The government welcomes general observations from respondents regarding the perceived advantages and disadvantages of each option for amending the PE definition.

Question 15: Do respondents foresee any issues with the UK limiting this definition to fixed place of business and dependent agent PEs?

Question 16: Do respondents foresee any specific issues with the UK changing its domestic law position in terms of the definition of a dependent agent PE? Do respondents foresee any specific issues with the UK changing its domestic law position in terms of the definition of an independent agent?

Question 17: Do respondents foresee any issue with the UK potentially changing its negotiating position, so that UK tax treaties might include these provisions?

Question 18: Do respondents foresee any issues with the UK aligning the domestic legislation on PE attribution either directly with the relevant double taxation treaty or with Article 7 of the OECD Model supported by the Commentary and the OECD Report on the Attribution of Profits to PEs?

Question 19: Would removing any particular aspects of the legislation in Chapter 4 CTA 09 be problematic?

Question 20: The government welcomes respondents’ views about possible unforeseen and/or unhelpful consequences or interactions with other parts of UK tax legislation which are not addressed in the above proposals.

Question 21: The government also welcomes any specific additions, exceptions or exemptions which respondents deem helpful to identify or add in at this stage.

Question 22: The government welcomes comments from respondents on the potential impact of the reforms contemplated in this consultation on the UK asset management sector.

Question 23: Do respondents foresee any issues with the removal of specific independence criteria for Lloyd’s agents (currently at section 1151 CTA 10)?

Diverted Profits Tax 

Question 24: The government welcomes respondents’ views as to whether this closer alignment of a diverted profits charge assessment to the CT enquiry framework would be a welcome simplification.

Question 25: The government invites respondents’ views on bringing Diverted Profits Tax into the CT framework as a standalone CT charge at a higher rate in respect of arrangements designed to inflate expenses, reduce income, or avoid a UK PE.

Question 26: The government welcomes respondents’ views as to whether it would simplify the legislation not to directly replace s. 86 and instead use a diverted profits assessments on UK entities to challenge arrangements which would currently fall under s. 86 and any other comments any other comments in respect of s. 86 and avoided PEs.

Question 27: The government welcomes the views of respondents as to whether amending the definition of reduction in income in s. 107(3) FA 15 and changing the definition of ‘qualifying loss relief’ would bring clarity and would welcome any other comments in respect of the functioning of the ETMO.

Question 28: The government welcomes respondents’ views as to whether amending the provisions for the calculation of the taxable diverted profits would bring clarity on the application of the legislation to loss-making companies.

Question 29: The government welcomes respondents’ views on options to clarify the scope of the IESC and amending the legislative definition of the tax reduction, to improve the functioning of the IESC.

Question 30: The government welcomes respondents’ other comments how to modify the IESC to improve its functioning, and the areas that cause the most complexity.

Question 31: The government welcomes respondents’ views on this change to the circumstances in which an amending notice can be issued and the scenarios where they consider such a policy should apply.

Question 32: The government welcomes respondents’ views on amending the definition of the material provision to ensure that it identifies the arrangements actually entered into by the relevant parties and any other comments in respect of the material provision.

Question 33: The government welcomes respondents’ views on amending the definition of the RAP to the arm’s length provision and would welcome any other comments in respect of the RAP.

Question 34: The government welcomes respondents’ views on whether the legislation currently at s. 85 would be sufficient to enable calculation of diverted profits charges in all cases if the RAP is updated as described.

Question 35: The government welcomes respondents’ views on whether (if the actual provision condition is retained) updating the inflated expense condition would improve the operation of the diverted profits regime and would welcome any other comments in respect of the inflated expense condition.

8. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

Stage 1: Setting out objectives and identifying options.

Stage 2: Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3: Drafting legislation to effect the proposed change.

Stage 4: Implementing and monitoring the change.

Stage 5: Reviewing and evaluating the change.

This consultation is taking place during stage 1 of the process. The purpose of the consultation is to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

How to respond

A summary of the questions in this consultation is included at chapter 6.

Responses should be sent by 14 August 2023, by email to [email protected].

Please do not send consultation responses to the Consultation Coordinator.

Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address.

All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

Confidentiality

HMRC is committed to protecting the privacy and security of your personal information. This privacy notice describes how we collect and use personal information about you in accordance with data protection law, including the UK GDPR and the Data Protection Act (DPA) 2018.

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the DPA 2018, UK GDPR and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the Freedom of Information Act 2000, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs.

Consultation Privacy Notice

This notice sets out how we will use your personal data, and your rights. It is made under Articles 13 and/or 14 of the UK GDPR.

Your data

We will process the following personal data:

Name
Email address
Postal address
Phone number
Job title

Purpose

The purposes for which we are processing your personal data is: Reform of UK law in relation to transfer pricing, permanent establishments and Diverted Profits Tax.

Legal basis of processing

The legal basis for processing your personal data is that the processing is necessary for the exercise of a function of a government department.

Recipients

Your personal data will be shared by us with HM Treasury.

Retention

Your personal data will be kept by us for 6 years and will then be deleted.

Your rights

You have the right to request information about how your personal data are processed, and to request a copy of that personal data.

You have the right to request that any inaccuracies in your personal data are rectified without delay.

You have the right to request that any incomplete personal data are completed, including by means of a supplementary statement.

You have the right to request that your personal data are erased if there is no longer a justification for them to be processed.

You have the right in certain circumstances (for example, where accuracy is contested) to request that the processing of your personal data is restricted.

Complaints

If you consider that your personal data has been misused or mishandled, you may make a complaint to the Information Commissioner, who is an independent regulator. The Information Commissioner can be contacted at:

Information Commissioner’s Office
Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF

0303 123 1113 [email protected]

Any complaint to the Information Commissioner is without prejudice to your right to seek redress through the courts.

Contact details

The data controller for your personal data is HMRC. The contact details for the data controller are:

HMRC
100 Parliament Street
Westminster
London
SW1A 2BQ

The contact details for HMRC’s Data Protection Officer are:

The Data Protection Officer
HMRC
14 Westfield Avenue
Stratford
London
E20 1HZ

[email protected]

Consultation principles

This call for evidence is being run in accordance with the government’s Consultation Principles.

The Consultation Principles are available on the Cabinet Office website.

If you have any comments or complaints about the consultation process, please contact the Consultation Coordinator.

Please do not send responses to the consultation to this link.

Annex: Relevant (current) government legislation

Part 3 Finance Act 2015

Schedule 6 Finance Act 2019

Clause 27 and 28 Finance Act 2021

Part 4 Taxation International and Other Provisions Act 2010

Part 2 Corporation Tax Act 2009

Chapter 2 Part 24 Corporation Tax Act 2010

1. Transfer pricing and Diverted Profits Tax statistics report for 2021 to 2022 tax year. ↩

2. The Swiss Federal Tax Administration instructed the 26 cantonal tax administrations to apply the OECD Transfer Pricing Guidelines directly via a circular letter first published in 1997 and renewed in 2004. ↩

3. S. 164 TIOPA 10 requires that Part 4 TIOPA 10 is interpreted in a manner which best ensures consistency with the OECD Model and Transfer Pricing Guidelines. ↩

4. Transfer pricing and Diverted Profits Tax statistics report for 2021 to 2022 tax year. ↩