There’s no sign that the turbulent international environment for transfer pricing will settle down soon. HMRC considers enforcement of transfer pricing and DPT rules an important element in ensuring that multinationals fulfil their UK obligations. New reporting rules with implications for transfer pricing policies and documentation are emerging with increasing regularity. The UK brought new legislation in relation to transfer pricing documentation into force in April 2023, and consultations into proposed legislative changes to transfer pricing, permanent establishments, and DPT rules are still ongoing.
HMRC’s determination to pursue enquiries related to transfer pricing is clear from its own annual statistics for the year to the end of March, which evidence the scale and success of these interventions. This information is all publicly available, but too few businesses are aware of them and the figures can be difficult to interpret. Understanding these statistics can help businesses see where HMRC is focusing and how to meet its expectations and cooperate effectively on enquiries.
The transfer pricing figures include additional tax revenue from enquiries, advance pricing agreements (APAs), mutual agreement procedures (MAPs) and advance thin capitalisation agreements (ATCAs).
Key statistics
The number of enquiry cases settled has decreased (by 22) compared to 2021-22, with the number of APA applications increasing from 40 in 2021-22 to 45 in 2022-2023. There has, however, been an increase in the number of APA applications being withdrawn during the same period. Ten applications were withdrawn compared with two the year before, but for the second consecutive year no applications were rejected. Fifteen APAs were agreed during the year, five less than in 2021-2022.
The implication is that there’s an increased appetite from taxpayers to apply for APAs and for HMRC to accept these into the programme, as taxpayers and HMRC seek certainty for transfer pricing arrangements given the appetite for opening enquiries by tax authorities around the world.
Only five ATCAs were agreed in 2022-2023, compared to seven in 2021-2022. The number of ATCAs in force has also continued to drop, with 30 in force in 2022-2023 down from 41 in 2021-2022. With the introduction of the corporate interest restriction legislation it’s no surprise that the popularity of ATCAs is on the decline. Unilateral ATCAs are, however, still useful in certain situations when certainty or transparency of interest deductions is required.
In the period 2022-23,131 MAP cases relating to transfer pricing were resolved, the same as in 2021-2022. This represents a large increase in the number of cases resolved compared to all other individual years back to 2016-17. This could indicate a renewed focus on MAP cases now that COVID-19 restrictions have lifted, and competent authorities can meet again to negotiate and resolve cases.
As stated previously, HMRC continues to show it's focused on transfer pricing risk and is committed to ensuring businesses are meeting their obligations through the introduction of new legislation, the opening of public consultations, and a continued focus on enforcement action where these obligations aren't being met. The continued pressure to maximise tax take and the increase in yield achieved by HMRC through enforcement action, and through dispute prevention and resolution mechanisms (APA, MAP and ATCA), show its commitment to this objective.
This continued focus on transfer pricing is expected to continue into 2023-2024. With new guidance being released through the guidelines for compliance (GfC), and potential legislative changes expected following the completion of public consultations, HMRC’s focus on transfer pricing is unlikely to lessen in the short to medium term.
Businesses will therefore need to actively manage this risk through ensuring they're compliant with UK transfer pricing rules and the arm’s-length principle, that transfer pricing policies are correctly implemented, and through having compliant transfer pricing documentation in place. They should be confident that their transfer pricing policies could stand up to scrutiny should HMRC approach them.
Transfer pricing enquiries are complemented by investigations into the diversion of profits out of the UK.
The extra tax and VAT revenue secured by diverted profits enquiries refers to where a business has agreed to stop diverting profits and calculates its corporate tax (CT) differently, leading to additional corporate tax liabilities for past and future periods. The DPT net amount from charging notices and the additional tax from those investigations settled through transfer pricing have both reduced considerably, which could indicate changing taxpayer behaviour due to the effectiveness of the DPT regime.
The scale of the additional revenue received between 2015-2016 and 2022-2023 (a total of £8.5 billion) is indicative of HMRC’s focus and the impact of BEPS 2.0 as the action plans filter through into business as normal.
HMRC clearly places DPT and the PDCF in the same bucket, stating that it’s investigating those registrants where their final PDCF proposals were rejected, and most multinationals that received PDCF letters and chose not to register. HMRC states it has settled over 200 investigations for additional CT and is currently carrying out around 90 reviews into multinationals with arrangements to divert profits, including those registered under PDCF.
HMRC also states that it's carrying out a number of litigation cases covering various international tax disputes where the business wasn’t prepared to change their arrangements and pay additional CT. It has also stated that there are a number of businesses under civil or criminal investigation by its fraud investigation service due to concerns with the way that arrangements to divert profits have been implemented, showing HMRC is willing to use all of its powers and resources to investigate such cases.
It’s worth noting that 97% of resolved PDCF cases had their final proposals accepted in 2022-2023, and that over £732 million in additional tax revenue has been secured from these resolution proposals and changes in taxpayer behaviour.
DPT and the PDCF are still areas of focus for HMRC, and are important tools in its arsenal for tackling international tax issues and ensuring the correct amount of tax is paid by businesses in the UK. While HMRC doesn't try to resolve these cases through transfer pricing means, the statistics show HMRC’s willingness to use all of its powers and resources where this isn't possible.
It's not expected that HMRC’s focus will shift away from DPT and PDCF in the short to medium term, so businesses should take the opportunity to ensure their arrangements are in order and could stand up to scrutiny, should they be approach by HMRC in future.
HMRC is also considering the effectiveness of its enquiries under its review of tax administration for large business programme, and has launched a pilot for an accelerated route for long-running transfer pricing enquiries. It's also working on publishing practical transfer pricing GfC, all of which aims to help taxpayers get their transfer pricing affairs in order before an enquiry is raised, or help to resolve enquiries more quickly once one is opened.
There’s also been no real change in the full-time equivalent (FTE) staff focused on these issues versus 2021-2022, with a reduction of only one. Some of the increases in time taken to resolve certain cases may be caused by the manner in which data and information is requested, collected, and shared between taxpayers and HMRC. This has been recognised by HMRC with a commitment to improving communication. The results may not be immediately clear from these statistics, but it has done lots of work behind the scenes to achieve it. Central to this was external research conducted in April and May 2022.
The key questions were gaining a greater understanding of customers’ experience of the PDCF and diverted profits enquiry processes, including how they might be improved and whether they impact customers’ behaviour. The research concluded that the majority of businesses:
HMRC’s own statistics also show that over £732 million additional revenue has been secured from resolution proposals through the PDCF since 2019, when it was introduced. It also considers the PDCF has been very successful since being introduced. HMRC is now focusing even more resources on those businesses that avoid paying tax, and reviewing how the process can be expanded and used to help address other areas of tax risk.
It's considered safe to say that HMRC will continue to focus on enforcement actions where it thinks transfer pricing policies may not be in line with economic reality or the arm’s-length principle, and will continue to use all its powers to do this. However, HMRC is keen to focus its resources on complex cases that will lead to the largest adjustments and potentially the greatest additional tax yields. Therefore, the GfC, when it's issued, will be a great help to businesses in terms of setting out what HMRC expects and what best practice will be. In addition, help from professional advisers can assist businesses to get things right first time, to reduce the risk of enquiries being opened in the first place, or if they are, having these resolved in as short a timeframe as possible.
Given the ever-changing environment and focus of HMRC on transfer pricing and DPT issue, businesses should continually review their transfer pricing policies and documentation to ensure this follows the UK regulations, HMRC guidance, and the arm’s-length principle. And that this can stand up to scrutiny in the situation HMRC open an enquiry.
For more insight and guidance, get in touch with Kirsty Rockall or Tom Heal.
