CIOT supports plans to align tax rules for multinational profits with international standards

Responding¹ to an HMRC consultation² on transfer pricing, permanent establishment and the UK’s existing Diverted Profits Tax,³ the CIOT said it supported the overarching recommendations, which would simplify tax rules and provide greater certainty to businesses.

However, the Institute called for care to be taken to ensure any rewritten rules continue to meet their objectives. The CIOT also suggested that some of the rules are improved. For example, how they apply to joint ventures, which is where two or more companies combine resources and expertise for certain projects.

Sacha Dalton, CIOT Technical Officer for International Tax, said:

“We broadly welcome these changes, which would more closely align the UK’s domestic legislation with international standards to ensure consistency.

“Differences from the agreed international guidelines complicate compliance for taxpayers and reduce the benefit of having reached a global consensus as to what the rules should be. Updating these rules in the UK would provide greater certainty, assist in the settlement of mutual agreement procedures and enhance the attractiveness of the UK for businesses.

“However, the areas under consideration are complicated and care will be required to ensure the objectives are met.”

The CIOT also supports aligning charges under the Diverted Profits Tax more closely with corporation tax, which would simplify the process and bring it within the scope of double tax treaties.

However the Institute has raised questions about plans to align the UK’s definition of permanent establishment with Article 5 in the 2017 OECD Model, following changes to the article in 2017.

Sacha Dalton explained:

“While this alignment would be a simplification for both taxpayers and tax administrators, businesses have expressed concerns about the potential impact of the changes, which would reduce certainty and, potentially, lead to a proliferation of permanent establishments.

“These concerns remain valid and insufficient time has passed since the changes to Article 5 to conclude that they are not giving rise to these problems.”

Notes for editors

1. Reform of UK law in relation to transfer pricing, permanent establishment and Diverted Profits Tax: Response by the Chartered Institute of Taxation.
2. HMRC consultation: Reform of UK law in relation to transfer pricing, permanent establishment and Diverted Profits Tax.
3. Transfer pricing refers to the rules designed to stop multinationals from arranging their finances so all their profits end up in low- or no- tax countries. In the UK this means the profits attributed to a UK company are those which the company would have made had it been a separate, independent company dealing with the non-UK parts of the group on “arm’s length” terms. A company has a permanent establishment in a country if it has a fixed place of business there, for example, an office or factory, or if it has someone there acting as an agent of the company with the authority to do business on behalf of the company. If the activities of a company in any particular country do not amount to a permanent establishment, then the profits from those activities generally get taxed in its country of residence instead. The Diverted Profits Tax targets profits considered to have been artificially “diverted” from the UK and are not therefore subject to UK tax. As of 1 April 2023 it generally taxes diverted profits at a rate of 31%.