The publication of HMRC’s “Transfer Pricing and Diverted Profits Tax statistics 2021 to 2022” makes for interesting reading when considering trends in recent years. Sarah Howarth, Senior Tax Manager, summarises some key observations.
The number of transfer pricing enquiries continues to increase, with 175 cases settled in 2021/22.
It is notable that HMRC is relatively well staffed in this area, with just under 400 FTEs involved in investigating international issues. This is perhaps not surprising as, by its nature, transfer pricing type-matters often hinge on judgment, making them inherently higher risk from a loss of tax perspective. Equally, the additional tax revenues to be secured are potentially significant, particularly where the largest multinational enterprises (”MNEs”) are involved.
HMRC continue to offer taxpayers the opportunity to agree pricing in advance – by way of an advance pricing agreement (“APA”), or an advance thin capitalisation agreement (“ATCA”) for financing arrangements between related parties.
The time (and expense) involved in securing an APA means they continue to be a realistic option for only the largest taxpayers (for 2021/22, 20 APAs were agreed during the year after an average 58.3 months of negotiation).
The number of ATCAs agreed has decreased rapidly since 2016-2017 to only 7 in 2021/22. This reduction is clearly linked to the introduction of the corporate interest restriction (“CIR”) in 2017. The CIR rules provide a mechanical method for establishing interest disallowance, which for some taxpayers will result in a higher interest disallowance than under thin capitalisation provisions. Pursuing an ATCA is, therefore, now of either no or limited benefit.
Alternative Resolution Procedures:
Encouragingly, an increasing number of international cases are being resolved under Mutual Agreement Procedures (“MAP”) (a feature in more and more double tax treaties), and in a reduced period of time. In 2021/22, 131 cases were resolved in an average time of just under two years.
Taxpayers also potentially have access to timely resolution of international issues under HMRC’s Profit Diversion Compliance Facility (“PDCF”), which was launched in January 2019.
Under the PDCF, taxpayers who have concerns they may have shortcomings in their UK tax compliance, in so far as it concerns cross border matters, may request access to the facility.
The advantages of this are:
- An accelerated process,
- Potentially lower penalties, and
- A degree of security against future enquiry.
Diverted Profits Tax (“DPT”):
Since its introduction in 2015, the DPT has secured the Treasury in total over £8bn, though receipts notably declined in 2021/22. It will be interesting to observe whether now the most aggressive arrangements have been unwound, and DPT is factored into planning, whether this quantum of income will be sustained.
HMRC continue to dedicate significant resource to tackling non-compliance with regard to cross border activities. While certain “fast track” routes are now available, resolving a dispute with HMRC is a lengthy and costly exercise. Companies with any kind of international operations should consider whether their UK tax compliance in this area is “up to scratch”, as prevention is almost always better (and less costly) than cure.
Price Bailey has a team of international tax specialists who would be happy to discuss your business’s particular facts and circumstances.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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