In a joint presentation last week, HM Treasury and HMRC announced that the UK would opt out of treaty amendments that would strengthen the permanent establishment definition. The OECD concluded last year that the current definitions were open to widespread abuse and a significant cause of base erosion.
This surprising move by the UK comes against a backdrop of a continuing commitment to BEPS implementation by the government, confirmed as recently as the Autumn Statement on 23 November 2016. The UK has gone it alone before, though, departing from BEPS recommendations two years ago when it introduced the diverted profits tax (DPT, or what became known as the 'Google tax'). This unilateral move was seen by many as an unnecessary and a pre-emptive strike, whilst the government defended it as being complementary to the overall objectives of the BEPS reforms.
The reasons behind the UK’s position on the PE changes are not completely clear, although it could be that HMT and HMRC are trying to take a pragmatic view. It is possible they believe the changes are unnecessary as DPT will prevent the worst offences. HMT and HMRC should remember that to be successful, BEPS must ultimately deliver a coherent global approach to international tax. Whether or not the UK government believes it needs to implement a specific measure must be considered in the context of impact on other territories and the companies trying to operate across borders.
Businesses understand that there needs to be a 'new normal' for tax, where the right tax is paid in the right place, but BEPS is fundamentally about coherence so the days of unilateral measures should be over.
If you would like any more information on this issue please get in touch with Rebecca Reading or your usual RSM contact.