This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Welcome to the European Tax Blog.

Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

| 2 minutes read

The DPT is dead; long live the DPT!

Having introduced more than twenty brand-new taxes since the turn of the millennium — at a rate of roughly one new tax per year — did the UK government really announce yesterday the demise of the diverted profits tax (DPT) before it has reached its tenth birthday?

Well, not exactly: the government proposes to remove the DPT’s status as a separate tax, but replace it with an equivalent head of charge to corporation tax by transposing most of the existing DPT rules into the transfer pricing legislation.

That is the most eye-catching headline from the summary of responses to HMRC’s consultation on reforming the rules on transfer pricing, permanent establishments and the DPT, which Tanja Velling summarised on this blog when the consultation was launched in June 2023.

The summary also confirms that the government will continue work on the other proposals that were set out in the consultation, most notably:

  • considering whether to align the UK domestic definition of a “permanent establishment” with the definition contained in the OECD Model Tax Convention (MTC),
  • revising the permanent establishment profit attribution rules so that they align with the MTC and international standards, and
  • tweaking the transfer pricing rules to make them clearer and better aligned with tax treaties.

The proposed reforms are intended to modernise and simplify the current legislation, with a view to improving legal certainty and securing access to treaty benefits. For example, the main reason for merging DPT into the CT regime is to seek to ensure that a charge under those rules should be treated as a “covered tax” under tax treaties (which DPT itself, by design, is not) and to reduce the risks of double taxation that currently arise from the complex interaction between the two regimes.

This is, therefore, a welcome change — albeit one that may give rise to new questions. For instance, is it entirely obvious that other countries will accept that a corporation tax charge under the transposed diverted profits regime is a genuine tax within the scope of treaties, rather than, as it could alternatively be characterised, a tax-geared penalty for the use of contrived arrangements?

Hence the broadly supportive, but guarded, tone of the responses, which will be used to inform further development of the proposals. The government plans to publish a technical consultation on draft legislation later this year.

As they have been presented thus far, in high level overview, the reforms seek sensibly to simplify and align the relevant rules and terminology. However, it remains to be seen whether, when it comes to turning good intentions into draft legislation, the project risks becoming bedevilled by details to such an extent that the reforms themselves create greater uncertainty than they seek to remedy.

This post was authored by Tom Gilliver.


transfer pricing, uk tax, diverted profits tax, permanent establishment, slaughterandmay