UK and International Tax news
HMRC Publishes Transfer Pricing and Diverted Profits Tax Statistics
Monday 20th August 2018
HMRC has recently published 2017/18 statistics in respect of transfer pricing and diverted profits tax yields and related information.
The UK’s transfer pricing rules set out how transactions between connected parties are priced for tax purposes and these generally include transactions between companies in the same group. The rules are designed to ensure that profits are taxed in accordance with the internationally recognised transfer pricing principle known as the arm’s length principle.
HMRC challenges arrangements that do not allocate the right amount of profits, i.e. the arm’s length amount to the UK and in the years 2012/13 to 2017/18 secured £6.5bn of additional tax by challenging the transfer pricing arrangements of multinationals, with £1.682bn in 2017/18.
HMRC has increased the number of staff dealing with international tax risks, including transfer pricing and as at 30 April 2018, there were 365 full time equivalent staff working on international risks, including transfer pricing and diverted profits tax. HMRC emphasizes it recognises the importance of identifying and tackling international tax risks and is invested in building the capability of the staff involved who work with other expert industry and tax specialists to tackle those cases that represent a substantial risk of tax loss to the Exchequer in line with HMRC’s “resource to risk” compliance policy.
HMRC also works with other tax authorities, sharing information and expertise, to identify risk and challenge arrangements. Country by Country reports for example will increase the information available to support HMRC’s risk assessment processes.
The Diverted Profits Tax rules are designed to encourage large companies that try to minimise their tax liabilities through the use of contrived arrangements to change their behaviour, or face paying tax at a higher rate. It is not targeted specifically at any particular sectors or companies, but rather at particular behaviours and arrangements.
DPT yield has increased from £31m in 2015/16 to £388m in 2017/18 and these figures reflect amounts received as a result of DPT charging notices issued by HMRC and additional amounts of corporation tax resulting from behavioural change. The amount raised from the issue of DPT charging notices during 2017/18 was £219m.
The behavioural change component of the DPT yield is comprised of additional corporation tax paid as a result of HMRC intervention to ensure that profits earned in the UK are taxed in the UK, and where businesses have changed their structures or transfer pricing arrangements without an HMRC intervention occurring. This means they pay additional corporation tax rather than DPT at the higher rate.
The anticipated Exchequer impact of DPT at the time of the March 2015 Budget was £360m in 2017/18.
Companies have to notify HMRC if they have arrangements that potentially fall within the scope of the DPT legislation, subject to limited statutory exceptions. Between 2015/16 and 2017/18 the number of DPT notifications received by HMRC increased from 48 to 220, although an obligation to notify does not necessarily mean that a DPT charge will arise.
Where HMRC believes that DPT may be due, a preliminary notice is issued and, depending on the company’s response, HMRC may then issue a charging notice setting out the amount of DPT to be paid by the company within 30 days.
Companies have six months from the end of the relevant accounting period to notify HMRC that they are potentially within scope of the legislation. HMRC then has two years to investigate to determine whether it is reasonable to issue a DPT preliminary notice.
In 2017/18, HMRC issued 200 DPT preliminary notices to 28 businesses and 190 DPT charging notices to 22 businesses.
The DPT legislation provides a 12 month review period after the notice is issued during which HMRC will continue to work with businesses to resolve the dispute. If, during the review period, HMRC is satisfied that the amount of DPT charged is excessive or insufficient, it can issue amending notices to reduce, or a supplementary notice to increase, the DPT charged.
Businesses have the right of appeal against a DPT charge after the conclusion of the 12 month review period. The DPT procedures are subject to a strict governance process, and all decisions to issue DPT notices are considered and agreed by a senior governance board.
If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.