HMRC had published the most recent transfer pricing and diverted profits tax (DPT) statistics for the period April 2018 to March 2019 (2018/2019), following on from similar release of data for prior periods since the DPT legislation came into effect from 1 April 2015.
The UK’s transfer pricing rules and DPT are important elements in a range of measures implemented by the UK to ensure multinationals pay the right amount of tax on the share of their profits that arise in the UK. Most notably since the last release of statistics in July 2018, the UK introduced the profit diversion compliance facility (‘the facility’) in January 2019 aimed at encouraging multinationals to review their tax affairs in accordance with the guidance provided and use the facility to disclose any additional tax liabilities from the past.
The diverted profits project is a clear priority for HMRC, based on the figures they have released about the significant number of ongoing investigations and resources they are allocating.
HMRC’s statistics on the diverted profits project demonstrate that their pursuit of changing multinationals’ behaviours and challenging arrangements that do not allocate the right amount of profits (the arm’s length amount) to the UK are generating significant additional tax revenue. It is of no surprise that this has resulted in HMRC generating more corporation tax than DPT, but for the first time, the statistics also reference VAT arising from business restructurings resulting from these ‘behavioural changes’. Where additional VAT has been charged to partly exempt businesses and private individuals, there may be a net VAT benefit to the Treasury. It is important to note that these figures do not incorporate any additional tax revenues generated from the facility which was in place for three months up to 2018/2019. It will be worth analysing the impact this facility has when measured in the 2019/20 figures.
Additional VAT from business restructurings of £1.8bn during 2018/2019, cumulatively £2bn since 2015.
On the diverted profits project, interesting references are also made about HMRC litigating various disputes where the business was not prepared to change their arrangements and pay additional corporation tax , as well as on diverted profits cases that are under civil or criminal investigation with HMRC’s Fraud Investigation Service.
Additional £1.2bn in revenues from transfer pricing enquiries during 2018/2019, totaling £7.2bn over the last six years. (HMRC changed its methodology during 2018/19 which led to restatements of data for prior periods.)
A key consideration for multinationals to manage the risk of transfer pricing investigations is obtaining certainty upfront through advance pricing agreements (APAs). Statistics on APAs have increased, despite the relatively strict criteria that HMRC sets for entering the programme. There continues to be questions on how the increasing number of APA applications will be managed, especially with many multinationals considering APAs to manage certainty for their post-Brexit transfer pricing models.
To successfully navigate this challenging landscape, proactivity and consistency in identifying, managing and addressing areas of the business subject to tax scrutiny will be critical for multinationals. Dispute resolution needs to be front of mind when managing transfer pricing risk across the lifecycle; from developing an integrated TP strategy, designing sustainable transfer pricing models, preparing supporting documents beyond Action 13 documentation, to regular review and monitoring.
The statistics from HMRC provide valuable insights into their priorities and approaches to international taxation, which should be carefully considered by any multinational operating in the UK.
Kapisha Vyas & Tomoko Ikawa, Simmons & Simmons
HMRC had published the most recent transfer pricing and diverted profits tax (DPT) statistics for the period April 2018 to March 2019 (2018/2019), following on from similar release of data for prior periods since the DPT legislation came into effect from 1 April 2015.
The UK’s transfer pricing rules and DPT are important elements in a range of measures implemented by the UK to ensure multinationals pay the right amount of tax on the share of their profits that arise in the UK. Most notably since the last release of statistics in July 2018, the UK introduced the profit diversion compliance facility (‘the facility’) in January 2019 aimed at encouraging multinationals to review their tax affairs in accordance with the guidance provided and use the facility to disclose any additional tax liabilities from the past.
The diverted profits project is a clear priority for HMRC, based on the figures they have released about the significant number of ongoing investigations and resources they are allocating.
HMRC’s statistics on the diverted profits project demonstrate that their pursuit of changing multinationals’ behaviours and challenging arrangements that do not allocate the right amount of profits (the arm’s length amount) to the UK are generating significant additional tax revenue. It is of no surprise that this has resulted in HMRC generating more corporation tax than DPT, but for the first time, the statistics also reference VAT arising from business restructurings resulting from these ‘behavioural changes’. Where additional VAT has been charged to partly exempt businesses and private individuals, there may be a net VAT benefit to the Treasury. It is important to note that these figures do not incorporate any additional tax revenues generated from the facility which was in place for three months up to 2018/2019. It will be worth analysing the impact this facility has when measured in the 2019/20 figures.
Additional VAT from business restructurings of £1.8bn during 2018/2019, cumulatively £2bn since 2015.
On the diverted profits project, interesting references are also made about HMRC litigating various disputes where the business was not prepared to change their arrangements and pay additional corporation tax , as well as on diverted profits cases that are under civil or criminal investigation with HMRC’s Fraud Investigation Service.
Additional £1.2bn in revenues from transfer pricing enquiries during 2018/2019, totaling £7.2bn over the last six years. (HMRC changed its methodology during 2018/19 which led to restatements of data for prior periods.)
A key consideration for multinationals to manage the risk of transfer pricing investigations is obtaining certainty upfront through advance pricing agreements (APAs). Statistics on APAs have increased, despite the relatively strict criteria that HMRC sets for entering the programme. There continues to be questions on how the increasing number of APA applications will be managed, especially with many multinationals considering APAs to manage certainty for their post-Brexit transfer pricing models.
To successfully navigate this challenging landscape, proactivity and consistency in identifying, managing and addressing areas of the business subject to tax scrutiny will be critical for multinationals. Dispute resolution needs to be front of mind when managing transfer pricing risk across the lifecycle; from developing an integrated TP strategy, designing sustainable transfer pricing models, preparing supporting documents beyond Action 13 documentation, to regular review and monitoring.
The statistics from HMRC provide valuable insights into their priorities and approaches to international taxation, which should be carefully considered by any multinational operating in the UK.
Kapisha Vyas & Tomoko Ikawa, Simmons & Simmons
