INTM489130 - Unassessed Transfer Pricing Profits Conditions: The Effective Tax Mismatch Outcome (ETMO)
UTPP will apply to accounting periods beginning on or after 1 January 2026. This guidance will be updated with detailed examples by 1 January 2026. For earlier accounting periods please use the diverted profits tax guidance at INTM489500
TIOPA10/S217C
TIOPA10/S217D
In order for unassessed transfer pricing profits to be assessed under UTPP, the provision must have an ETMO.
The ETMO gateway is a mechanical test. Its purpose is to identify whether the provision giving rise to the unassessed transfer pricing profits has resulted in a material tax reduction, once the tax paid by the other party to the provision is taken into account.
The provision between the company and the other party has an ETMO for an accounting period if the corresponding amount is less than 80% of the underlying corporation tax amount.
The corresponding amount is broadly the amount (which may be nil) of relevant tax:
- due and payable by the other party and
- charged (in any period) on profits that correspond to the unassessed transfer pricing profits.
The underlying corporation tax amount is the amount of corporation tax that would be charged on the unassessed transfer pricing profits, if those profits were included in the company’s profits on which corporation tax is chargeable for the accounting period. This is calculated by applying the underlying corporation tax rate in s217A(4) to the unassessed transfer pricing profits as defined in s217B(2).
Tax due and payable by the other party
For the purposes of S217D, the corresponding amount is only considered due and payable by the other party if certain criteria are met.
Where the tax has been paid, then the tax:
- should not have been refunded, and
- would not be refunded if all reasonable steps were taken to secure that it was refunded
The amount of relevant tax is refunded if and to the extent that:
- any repayment of tax or payment in respect of credit for tax is made to any person, and
- that repayment or payment is directly or indirectly in respect of the whole or part of the amount of relevant tax paid by the other party.
If the tax has not been paid, then it would remain due and payable if all reasonable steps were taken to minimise the amount.
Reasonable steps include claiming or otherwise securing the benefit of reliefs, deductions, reductions or allowances, and making elections for the purpose of the relevant tax.
This approach ensures that the amount of tax recognised as due and payable under the ETMO test is reflective of the true tax liability.
Any withholding tax which is due and payable on payments made to the other party is (unless it is refunded) to be treated as tax which is due and payable by the other party (and not the person making the payment).
It should be noted that the statute refers to the tax due and payable, as opposed to the amount of profits liable to tax. This means that if the unassessed transfer pricing profits are fully recognised by the other party in a low or no-tax jurisdiction, then the ETMO may still be met on the basis that the overall amount of tax paid is significantly lower than if the profits had been brought into account in the UK.
Tax charged on profits that correspond to the unassessed transfer pricing profits
In addition to the tax being due and payable, it should be charged (in this accounting period or prior periods) on profits that correspond to the unassessed transfer pricing profits.
The profits are not the unassessed transfer pricing profits themselves, which arise to the company. They are instead the profits that arise to the other party as a result of the provision.
Relevant Tax
S217D(8) defines relevant tax for the purposes of the ETMO gateway as:
- Income tax
- Corporation tax
- Any amount chargeable as if it were corporation tax or treated as if it were corporation tax, other than the CFC Charge within Part 9
- Any foreign tax on income
An amount chargeable as if it were corporation tax includes the surcharge on banking companies and oil and gas supplementary charge tax.
S217T provides that foreign tax has the same meaning as S259B(2), (3) and (3ZA), which define foreign tax as a tax chargeable under the law of a territory outside the UK so far as it is charged on income, and corresponds to UK income tax or corporation tax. This ensures that the UK and foreign taxes compared are like-for-like.
Foreign tax therefore does not include:
- taxes chargeable under the law of a province, state or other part of a country
- taxes levied by or on behalf of a municipality or other body
- a tax charged on income that has arisen to an entity that is not subject to the tax (as regards that income), and is under the law of the territory regarded as being a person for the purposes of tax, but is to be brought into account for the purposes of that tax by a different entity
For more information see INTM550520.
Wider considerations
The ETMO focuses on relevant taxes payable by the other party, so there are circumstances in which an ETMO can technically arise although there has not actually been a tax reduction to the group as a whole. This may occur, for example, where the other party is part of a tax consolidation group or where its profits are subject to a particular regime such as the Non-Resident Landlords Scheme.
However, the existence of an ETMO will not in itself give rise to a charge to UTPP, because there must be unassessed transfer pricing profits and the TDC must also be met. These tests are unlikely to be met where there is no actual tax reduction to the group and there would have been no expectation of such a reduction.
There will also be circumstances in which an ETMO arises for a commercial reason (including timing differences, as outlined below), which could include situations such as:
- a payment to a collective investment vehicle as part of a commercial investment structure
- where a company meets the conditions of the Taxation of Securitisation Companies Regulations (SI 2006/ 3296) such that it is taxable (in accordance with regulation 14) on the basis of cash retained rather than on its profits as calculated under the normal corporation tax rules
However, in order for UTPP to apply there must also be unassessed transfer pricing profits and the TDC must be met. If these conditions are not met such that there is only an ETMO, and the ETMO arises for a commercial reason, then UTPP will not apply.
Timing differences
In most cases, the accounting period in which the unassessed transfer pricing profits arise will be the same accounting period in which:
- tax was charged on profits that correspond to the unassessed transfer pricing profits, and
- the profits would otherwise have been assessed to corporation tax
There may be circumstances where there are timing differences arising from when the profits have been recognised for tax purposes. For example, where the other party has a different accounting period.
The corresponding amount includes any tax charged on profits that correspond to the unassessed transfer pricing profits.
However, the underlying corporation tax amount only looks at the amount of corporation tax that would otherwise be charged on the unassessed transfer pricing profits arising in the accounting period in question.
This may mean that there is an ETMO due to the timing differences arising from when the profit has been recognised by each party. As above, in order for UTPP to apply there must also be unassessed transfer pricing profits and the TDC must be met. As long as there is only an ETMO because of timing differences, then these conditions are unlikely to be met such that UTPP applies.
Transparent entities
There are specific rules which apply where the other party to the provision is a transparent entity. The other party is a transparent entity if for the purposes of the relevant tax under the law of the territory in which that party is legally constituted, profits that correspond to the unassessed transfer pricing profits are treated as the income or profits of a person or persons other than the other party.
In such circumstances, references to the relevant tax that is due and payable by the other party include relevant tax which is due and payable by that other person or persons.
Where the other party is a transparent entity situated in an overseas territory, there are likely to be practical difficulties for HMRC in identifying the amount of tax that is due and payable in respect of the unassessed transfer pricing profits. To address this, the UTPP legislation contains a rebuttable presumption under which the ETMO is presumed to be met for such a provision unless HMRC is satisfied that it does not have such an outcome for the accounting period. This places the responsibility upon the company in receipt of the preliminary notice to provide HMRC with the information required to test whether the ETMO gateway is met and, if so, calculate the amount of tax that is due and payable. Where the rebuttable presumption is likely to be in point, wherever possible HMRC will engage in early discussion to understand if there is likely to be an ETMO.
The company can rebut this presumption by providing details of the tax due and payable by the other party during the period for representations. Where the ETMO has been treated as met under the rebuttable presumption, then the period for representations (see X) is extended from 30 days to 60 days in order to allow the company additional time to obtain the relevant information. This extension only applies to representations made on the grounds that the ETMO is not met, and so the normal 30-day period applies for other representations.
Where applicable, the company can provide representations on the basis that the other party to the provision is not a transparent entity. In such cases the extended time for representations will still apply.
Once the 60-day period has elapsed, further information can still be provided to HMRC during the period for amendments.