On 1 August 2018 HMRC released a document showing the latest statistics relating to transfer pricing and the diverted profits tax (DPT). The transfer pricing rules and the DPT are seen by HMRC as an important part of the range of measures in place to ensure that multinational enterprises pay the correct amount of tax on the share of their profits relating to the UK. HMRC considers that it collected an additional GBP 6.5 billion of tax in the years 2012/13 to 2017/18 by challenging transfer pricing arrangements by multinationals.
The total yield from application of the transfer pricing rules in 2017/2018 is estimated to be GBP 1,682 million. The average age of settled transfer pricing enquiries was 24.7 months in the year to 31 March 2018 although the average age of enquiries that were still open at the end of the year was 30.4 months. The document notes that HMRC has increased the number of staff dealing with international tax risks including transfer pricing and there were 365 full time equivalent staff devoting their time to international tax risks as at 30 April 2018.
Advance Pricing Agreements
HMRC agreed 27 advance pricing agreements (APAs) in the year to 31 March 2018. The average time to reach agreement on an APA was 37.1 months. In the year 16 APA applications were made and six applications were rejected.
Advance Thin Capitalization Agreements
A total of 79 Advance Thin Capitalization Agreements (ATCAs) were agreed in the year to 31 March 2018. These are agreements between a business and HMRC in relation to how transfer pricing rules apply to funding issues, including the levels, terms and conditions of debt financing between related parties.
Mutual Agreement Procedure
The mutual agreement procedure (MAP) article of a bilateral double tax treaty allows tax administration to endeavour to settle issues around double taxation through consultation between the competent authorities of the two contracting states. A MAP is also possible under the terms of the EU Arbitration Convention.
In the year to 31 March 2018 71 cases were resolved under the MAP and the average time taken to resolve a case was 27.5 months. 103 cases were admitted during the year.
Statement of Practice SP 1/2018, published at the beginning of 2018, contains updated guidance on the procedure. Updated guidance on MAPs has also been published in HMRC’s International Manual.
Diverted Profits Tax
In 2017/18 a total of GBP 388 million was raised from the diverted profits tax. HMRC considers that this tax yield is one benefit of the tax, the other being the behavioural change by businesses that change their structure or transfer pricing arrangements without the need for intervention by HMRC.
The Diverted Profits Tax applies to three types of arrangement:
- An arrangement where a foreign company supplies goods, services or other property; the activity is designed to ensure that a permanent establishment (PE) is not created; and either the main purposes is to avoid UK tax or the arrangements secure a tax mismatch that significantly reduces the total tax derived from UK activities.
- A situation where a UK company is using transactions or entities that do not have economic substance to exploit tax mismatches.
- An arrangement where a foreign company with a UK taxable presence (a PE) exploits tax mismatches using transactions or entities that lack economic substance.
Companies are required to notify HMRC if they have arrangements in place that would potentially fall within the scope of the DPT. They must notify HMRC within six months after the end of the relevant accounting period. In 2017/18 220 notifications were received by HMRC. Although companies are obliged to notify HMRC this does not necessarily mean that DPT will be due.
If HMRC considers that DPT may be due it issues a preliminary notice. Following the company’s response a charging notice may be issued, setting out the amount of DPT the company must pay within 30 days. In 2017/18 HMRC issued 200 preliminary notices to 28 businesses and 190 charging notices to 22 businesses.
