In focus: Transfer pricing, permanent establishment and unassessed transfer pricing profits
Recent UK reforms, together with developments at OECD level, indicate significant changes to the operation of transfer pricing (TP) rules, permanent establishment (PE) concepts and the UK’s approach to diverted profits. Collectively, these measures reflect a shift towards more standardised, data‑driven tax frameworks aligned with international tax principles.
For insurance groups, these developments are particularly significant given the inherently cross border nature of underwriting, reinsurance arrangements, intra group service models and capital provision.
As scrutiny over matters such as profit allocation increases, insurers may need to reassess how profits are allocated across jurisdictions in relation to risk assumption, capital deployment and value creation. Strengthening governance frameworks and adopting a more proactive, coordinated approach to identifying and managing cross-border tax risk will be critical in supporting robust and defensible tax positions.
Transfer Pricing
Following a series of consultations conducted between 2023 and 2025, the UK Government has announced reforms expected to take effect from January 2026.
Simplification
A key reform is the introduction of a general exemption for domestic transactions where both parties are subject to UK corporation tax at the same rate.
Expanded participation condition
A central aspect of the reforms is the expansion of the participation condition, which determines whether entities are sufficiently connected for transfer pricing rules to apply. Historically, this condition relied heavily on legal ownership and formal control, which in some cases allowed economically connected entities to fall outside the transfer pricing regime through fragmented or non‑traditional structures.
Under the revised framework, the concept of “associated enterprises” is intended to be interpreted more broadly, taking into account practical control, material influence and coordinated behaviour, in line with OECD principles.
New anti‑avoidance provisions are also expected, these are aimed at structures involving “ownerless” vehicles, fragmented ownership or artificial governance arrangements.
HMRC will be able to consider whether the participation condition is met as part of a transfer pricing enquiry, rather than participation operating solely as a preliminary threshold issue. This represents a material change to HMRC’s enforcement approach.
Enhanced reporting and documentation
For accounting periods beginning on or after 1 January 2027, large multinational groups are expected to be required to submit an International Controlled Transactions Schedule (ICTS) alongside their UK Corporation Tax return. The proposed regime, which remains subject to technical consultation, is intended to apply broadly to groups within the scope of Country‑by‑Country Reporting (i.e. groups with global consolidated revenue of €750 million or more).
The ICTS is expected to require detailed reporting of cross‑border related‑party transactions, including transaction type, value, counterparty jurisdiction and the transfer pricing methodology applied. While it will not replace existing transfer pricing documentation requirements, the ICTS represents a shift towards earlier, data‑driven risk assessment by HMRC, providing increased visibility over international income and profit flows. Filing is expected to align with the Corporation Tax return deadline, typically 12 months following the end of the accounting period.
Taken together, these measures reflect increased alignment with OECD standards while significantly expanding the level of transparency and scrutiny applied to multinational groups.
Permanent Establishment
Recent OECD commentary and updates to the Model Tax Convention provide important clarification, much of which is reflected in current UK practice.
Remote working, from home or another overseas location, will not in itself give rise to a permanent establishment. However, PE risk may arise where remote working arrangements become sustained, commercially driven and integral to the enterprise’s business, particularly where the activities performed go beyond preparatory or auxiliary functions. For example, where an individual habitually plays a significant role in negotiating key policy terms or concluding contracts from an overseas location, PE exposure may increase, even if contracts, final sign off or policy issuance are formally executed elsewhere.
The UK has further aligned its domestic PE rules with the OECD 2017 Model, including updated profit attribution principles and an expanded dependent agent test designed to capture circumstances where a person habitually plays the principal role leading to the conclusion of contracts.
From Diverted Profits Tax to Unassessed Transfer Pricing Profits
For accounting periods beginning on or after 1 January 2026, the Diverted Profits Tax (DPT) ceases to operate as a standalone tax and is replaced by a Corporation Tax charge on Unassessed Transfer Pricing Profits (UTPP). This reform integrates diverted profits concepts into the mainstream Corporation Tax framework while preserving the underlying policy objective. Although the terminology has changed, HMRC’s focus remains on arrangements that lack economic substance or seek to exploit transfer pricing or PE mismatches.
Key Upcoming Deadlines
EU Public Country‑by‑Country Reporting
EU public Country‑by‑Country Reporting represents a shift from confidential reporting to mandatory public disclosure. The regime applies to multinational groups within the scope of Country‑by‑Country Reporting that have an EU presence, either through EU‑resident entities or EU‑listed operations.
For groups with a 31 December 2025 year end, public reporting obligations will generally apply for the first time by 31 December 2026. However, earlier publication deadlines apply in certain EU Member States and should be monitored closely.
Pillar Two: Global Minimum Tax
OECD Pillar Two, which introduces a global minimum effective tax rate of 15% for groups with consolidated revenues of €750m or more, is now in force in the UK. The first UK filings relate to accounting periods ending on 31 December 2024, with returns due by 30 June 2026.
Key Considerations for Businesses
- Review transfer pricing policies and documentation to ensure alignment with OECD guidance and anticipated ICTS requirements
- Assess potential permanent establishment exposure arising from cross‑border and remote working arrangements
- Evaluate governance, systems and data capabilities to support enhanced reporting and compliance obligations
Conclusion
The combination of UK transfer pricing reform, clarification of permanent establishment thresholds, changes to the diverted profits regime and the implementation of Pillar Two represents a significant phase in the evolution of international tax regulation. While these measures are intended to enhance certainty and fairness, they also increase compliance, audit and reputational risk for multinational groups. Early assessment, robust governance and careful monitoring will be critical in navigating this evolving environment.
For further information, please contact Transfer Pricing Director Farhan Azeem or Corporate Tax Partner Mimi Chan.
