Her Majesty's Revenue and Customs (HMRC) has published tax data for 2018/2019 on transfer pricing and diverted profits tax (DPT). The UK's transfer pricing rules and the DPT are both important elements in a range of measures that the UK adopted to make sure multinationals pay the right amount of tax on the share of their profits that belong to the UK.
The latest statistics show:
- An additional GBP1.1 billion in revenue from transfer pricing enquiries, with more than GBP7 billion over the last six years.
- Additional DPT revenue of GBP12 million in 2018/19, and GBP369 million cumulatively:
- During this period 203 DPT preliminary notices were issued to 11 customer groups and 204 DPT charging notices were issued to 13 customer groups.
- Currently 100 investigations into groups with diverted profits, with GBP2.9 billion of tax, are under review.
- Two-thirds of companies receiving nudge letters have used the facility to bring their tax affairs up to date, allowing HMRC to focus resources on those who remain with diverted profits.
- The average time to obtain an advanced pricing agreement (APA) in the UK has decreased slightly, and the number of APAs submitted has risen, with 30 APAs agreed in the year (in line with the six-year average).
- 91 mutual agreement procedure (MAP) cases were admitted and a record number of 95 MAP cases were resolved in the year.
- HMRC has increased the number of full-time equivalent staff working on international issues to 441, involving work related to transfer pricing, diverted profits tax and cross-border debt.
- HMRC specifically states that country-by-country (CbC) reports have increased the information available to support their risk assessment process.
HMRC's publication of transfer pricing and diverted profits tax data for 2018/9 clearly shows that audit activity continues at unprecedented levels, and is effective in increasing revenue collected from multinational groups. The evidence further suggests that the amount of DPT assessments is relatively modest compared with the transfer pricing adjustments during the same period.
This is in line with our view – and that of many UK companies – that managing transfer pricing across a group must be a priority for tax functions in multinational groups with a presence in the UK. Groups need a comprehensive transfer pricing approach that includes working with the business, establishing a transfer pricing policy design and compliance approach, through to tax audit defence and risk management. Analysis of the transfer pricing issues need to be supported by evidence that will be needed in transfer pricing audits. With this in mind, multinational groups operating in the UK would be well advised to review their approaches in the UK.
We have previously commented on the role we believe a well-thought-through APA and MAP strategy has in a multinational group. APA and MAP are both tools at the disposal of multinational groups that until now have been largely underused. The growing level of activity reported by HMRC in these statistics confirms that this strategic choice is in line with the conversations we are having with companies and the resulting APA/MAP applications we are submitting on their behalf.
Access our updated guide on APA and MAP in over 50 countries.