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Policy, trends and developments
Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?
Pursuant to Section 164 of the Taxation (International and Other Provisions) Act 2010, the UK transfer pricing legislation must be used to ensure consistency with the arm’s-length principle in Article 9 of the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital. The United Kingdom has also incorporated the OECD Transfer Pricing Guidelines into its domestic law and the legislative framework is supplemented by formal guidance issued by the UK tax administration, Her Majesty’s Revenue and Customs.
Trends and developments
Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?
Revisions to the OECD Transfer Pricing Guidelines that were made as a result of Base Erosion and Profit Shifting Actions 8 to 10 have been incorporated into UK domestic law since April 1 2016 for corporation tax purposes and financial year 2016-2017 for income tax purposes. It is expected that there will be further developments concerning transfer pricing due to the United Kingdom’s decision to leave the European Union in June 2016 and the regulatory changes that this will likely entail.
While transfer pricing cases remain rare in the United Kingdom, one of the first cases to analyse the United Kingdom’s transfer pricing legislation – DSG Retail Ltd v Revenue and Customs Commissioners (2009 UKFTT 31) – concerned the reinsurance of risk with a captive insurance company in the Isle of Man. The case analysis spanned from the period before the United Kingdom had changed its transfer pricing legislation from an outdated provision (Section 770 of the Income and Corporation Taxes Act 1988) to a more complex provision with a clear link to the OECD Model and Guidelines under Schedule 28AA to the Income and Corporation Taxes Act 1988. Although the decision focused mostly on the hearing of evidence and the selection of comparables, its discussion of the law includes a comparison of the difference between the old and new legal regimes for transfer pricing adjustments. This is followed by a discussion of the OECD Transfer Pricing Guidelines. The final decision accepted that the conditions differed from those at arm's length and found that a profit split method should be applied.
Domestic legislation and applicability
What primary and secondary legislation governs transfer pricing in your jurisdiction?
Part 4 of the Taxation (International and Other Provisions) Act 2010 contains the UK transfer pricing provisions. The legislation operates as part of the United Kingdom’s self-assessment regime, putting the onus on taxpayers to include any upward adjustments to commercial profits arising from the application of the arm’s-length principle in any tax returns.
The Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) Regulations 2016 (SI 2016/237) are also relevant for transfer pricing purposes. The regulations put into effect the United Kingdom’s introduction of country-by-country reporting for multinational enterprises (effective March 18 2016). Multinational enterprises are required to report details of revenue, profit, taxes and other details from each jurisdiction in which the enterprise operates to Her Majesty’s Revenue and Customs (HMRC) annually.
HMRC’s guidance on transfer pricing is set out in International Manual (INTM410000-INTM489030), which is available on the government’s website. While the guidance is not binding, it provides taxpayers with an insight into how HMRC interprets transfer pricing legislation.
Additionally, revisions to the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines that were made as a result of base erosion and profit shifting Actions 8 to 10 have also been incorporated into UK domestic law.
Are there any industry-specific transfer pricing regulations?
Certain industry-specific transfer pricing provisions exist in the UK transfer pricing legislation, specifically for the oil and gas sector. For instance, oil (and gas) taxation rules contain their own market value rule under Sections 280 and 281 of the Corporation Tax Act 2010. Where this applies, the arm’s-length provisions in Part 4 of the Taxation (International and Other Provisions) Act are no longer applicable and specific arm’s-length provisions are tested under Section 2 of the Oil Taxation Act 1975.
What transactions are subject to transfer pricing rules?
The UK transfer pricing rules apply to any provision made or imposed between associated parties by means of a transaction or series of transactions. Thus, there need not be a direct contractual relationship between the associated parties for the transfer pricing rules to apply. Domestic provisions, as well as cross-border provisions, fall within the rules. It should also be noted that transfer pricing risks are not limited to company-to-company transactions – for example, a transaction between a company and a controlling individual carrying on a business within the scope of income tax could fall within the scope of rules.
Further, pursuant to Section 166 of the Taxation (International and Other Provisions) Act 2010, small and medium-sized enterprises with fewer than 250 staff, a turnover of less than €50 million or balance sheet total of less than €43 million are exempt from the United Kingdom’s transfer pricing legislation (this exemption is subject to certain exceptions, including cases where transactions involve a party in a jurisdiction that does not have a tax treaty with the United Kingdom).
How are ‘related/associated parties’ legally defined for transfer pricing purposes?
Parties are related or associated for the purposes of the UK transfer pricing rules if the participation condition is met (Section 147(1) of the Taxation (International and Other Provisions) Act 2010).
The ‘participation condition’ broadly covers all situations where there is common control between the parties. Section 148 of the Taxation (International and Other Provisions) Act 2010 provides that the participation condition is satisfied if, at the time of the relevant provision (or within six months following the date of the provision in the case of financing arrangements):
- one of the parties directly or indirectly participates in the management, control or capital of the other; or
- the same person(s) directly or indirectly participate in the management, control or capital of both parties.
Pursuant to Sections 157 to 160 of the act, one party is considered to participate in the management, control or capital of another person if that person has rights enabling them to control that other person or a third party controls both parties; where two persons each hold a 40% interest in a company or partnership, each of them is considered to participate in the management, control or capital of that company or partnership and thereby be associated with it.
The participation condition is also satisfied where persons provide financing arrangements (whether debt or capital) for a company or partnership, such that if the rights and powers of each of the persons providing the financing were taken together and attributed to one person, that one person would have control of the company or partnership. Pursuant to Section 161 of the act, each of the persons providing the financing arrangements in those circumstances would be considered to be associated with the company or partnership.
For the purpose of most of these tests, the rights of connected parties are aggregated and the rights which parties are entitled to acquire in the future are also taken into account.
Are any safe harbours available?
The United Kingdom does not operate safe harbour arrangements. However, according to the International Manual (INTM482000-INTM482170), HMRC will apply a risk assessment process before commencing a detailed transfer pricing enquiry and may consider certain transfer pricing policies low risk.
Further, certain small and medium-sized enterprises are exempt from transfer pricing legislation (see above).
Which government bodies regulate transfer pricing and what is the extent of their powers?
HMRC has the power to undertake audits, enquire into self-assessment tax returns and make assessments and adjustments. Transfer pricing documentation (which is required to be kept to demonstrate that transactions are on an arm's-length basis) may be inspected by HMRC and, in the case of country-by-country reports, is filed with HMRC. HMRC is also the body responsible for any exchange of information with treaty partner countries.
Which international transfer pricing agreements has your jurisdiction signed?
The United Kingdom is signatory to more than 100 tax treaties with provisions that are applicable to cross-border transactions. These tax treaties are based on the OECD’s Model Tax Convention on Income and on Capital and include the arm’s-length principle. While, on the whole, the tax treaties are largely based on the model convention, each individual tax treaty may deviate somewhat from the model and the relevant treaty should therefore always be consulted. The United Kingdom is also signatory to tax information exchange agreements which provide for the exchange of information relating to specific tax matters under investigation.
Further, the United Kingdom is signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which will alter the effect of those tax treaties that have been entered into with some jurisdictions that are also signatories to the MLI.
The United Kingdom is also signatory to:
- the EU Arbitration Convention;
- the Convention on Mutual Administrative Assistance in Tax Matters; and
- the EU Tax Dispute Resolution Mechanism Directive.
While it is expected that the conventions to which the United Kingdom has signed up will continue to apply once it leaves the European Union, it is unclear what effect the EU directives will have on the jurisdiction.
To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?
Pursuant to Section 164 of the Taxation (International and Other Provisions) Act 2010, the arm’s-length standard contemplated in the United Kingdom's transfer pricing rules is to be interpreted in a way that best ensures consistency with the OECD transfer pricing guidelines. Accordingly, HMRC and the UK courts refer to the OECD guidelines when applying the arm's-length standard to both cross-border and domestic transactions.
Section 164 of the act suggests that the transfer pricing guidelines published by the OECD may be updated or replaced, and that these updated versions will also be treated as OECD guidelines, together with any supplementary publications.
Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
The methods are consistent with those provided in the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines, which are as follows:
- the comparable uncontrolled price (CUP) method;
- the resale price method;
- the cost-plus method;
- the transactional net margin method; and
- the profit split method.
Other methods may also be permissible where the facts and circumstances of the case mean that this is a more reliable way to determine the arm’s-length result. It may also be appropriate to combine two or more methods.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
The United Kingdom follows the OECD Transfer Pricing Guidelines and therefore, although in theory there is no overt hierarchy, the CUP method is considered preferable where it is available and if it is one of two or more equally reliable methods. Cost plus and resale price methods can be hard to apply in practice, given that they are gross profit methods. The transactional net margin method, under which the net profit margin is targeted, has been widely used in recent years, but given the increased complexity of transactions within modern businesses, the use of the profit split is on the increase.
It is prudent to establish why certain methods are chosen over others that are considered to be inherently more reliable. HMRC have written up comprehensive guidance on each method, based on the OECD Transfer Pricing Guidelines.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
Pursuant to Section 164 of the Taxation (International and Other Provisions) Act 2010, the UK transfer pricing legislation should be construed in a manner that best secures consistency with the expression of the arm’s-length principle in Article 9 of the OECD Model and the guidance in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Therefore, the following five comparability factors identified in those guidelines apply:
- the contractual terms of the transaction;
- the functions performed by each of the parties to the transaction, taking into account assets used and risks assumed, including how those functions relate to the wider generation of value by the multinational enterprise group to which the parties belong, the circumstances surrounding the transaction and industry practices;
- the characteristics of property transferred or services provided;
- the economic circumstances of the parties and of the market in which the parties operate; and
- the business strategies pursued by the parties.
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
The United Kingdom follows the OECD Transfer Pricing Guidelines, and therefore these should be considered when selecting transfer pricing methods.
Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
Regarding transfer pricing documentation generally, the government has announced its intention to adopt part of the Organisation for Economic Cooperation and Development’s (OECD’s) recommendations through the passage of the Taxes (Base Erosion and profit Shifting) (Country-by-Country Reporting) Regulations 2016. Pursuant to these regulations, the completion of a country-by-country report is mandatory.
Her Majesty’s Revenue and Customs (HMRC) has also released guidance supplementing the regulations, namely HMRC International Exchange of Information Manual IEIM300000.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
Transfer pricing documentation Although there are no specific transfer pricing documentation requirements in the United Kingdom, taxpayers are advised to maintain sufficient records that enable them to complete an accurate tax return, such as evidence demonstrating that transactions are at arm’s length. HMRC may request transfer pricing documentation from taxpayers, including information in relation to the functions, assets and risks in the United Kingdom compared with those belonging to other parts of the multinational enterprises. HMRC can commence information gathering procedures if the documentation is insufficient or is not submitted in response to a request.
Country-by-country report Multinational enterprises are required to file a country-by-country report with HMRC if it:
- has at least one entity based in the United Kingdom and at least one in another country; and
- a consolidated group revenue of at least €750 million.
Those enterprises required to file the country-by-country report to HMRC must provide:
- the amount of revenue and profit generated and tax paid; and
- the total number of employees, capital, retained earnings and tangible assets for each tax jurisdiction they operate in. For a group that is not resident in the United Kingdom and where its parent is resident in a jurisdiction that either does not require country-by-country reporting or does not exchange reports with HMRC, the top UK entity within the group will be required to file a report in respect of the entities beneath it.
The regulations have been amended, to extend these reporting requirements to partnerships with effect from April 20 2017.
A country-by-country report must be presented in the form directed by HMRC (which, in accordance with HMRC published guidance, requires the use of the OECD extensible mark-up language schema), completed following HMRC’s rules and submitted online via the HMRC portal.
Master file and local file There is not yet legislation for master file or local file requirements. However, where a master file has been prepared by a multinational enterprise for another jurisdiction, HMRC will likely expect the taxpayer to submit this on request.
What are the penalties for non-compliance with documentation and reporting requirements?
If a taxpayer causes a loss of UK tax through inaccuracies in its tax return, whether through carelessness or deliberate conduct, HMRC may impose penalties. As mentioned above, taxpayers should maintain contemporaneous transfer pricing documentation to demonstrate that any intragroup transactions were at arm’s length and that reasonable care was taken when making any transfer pricing adjustments to a tax return.
The penalty for not filing a country-by-country report is £300, plus £60 for each additional day that it is late following notification by HMRC (capped at £1,000). A £3,000 fine will be levied where taxpayers knowingly file a country-by-country report containing inaccurate information.
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
Even though there is no official requirement to file a master file and local file, it is common practice to have these documents as audit risks are high when they are absent.
Documentation at all three levels – country-by-country report, master file and local file – should be aligned and the overall outcome must be consistent with the functional analysis pertaining to all entities in the group.
As noted above, UK taxpayers are required to keep sufficient records and documents in order to demonstrate that their transactions with associated parties have taken place on an arm's-length basis or, where this is not the case, appropriate adjustments have been made.
Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
Unilateral, bilateral and multilateral advance pricing agreements, as well as advance thin capitalisation agreements, are available.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
The following provide for and apply to advance pricing agreements:
- Sections 218 to 230 of the Taxation (International and Other Provisions) Act 2010;
- Her Majesty’s Revenue and Customs (HMRC) Statement of Practice 2 (2010) (and Statement of Practice 1/2012 in relation to Advance Thin Capitalisation Agreements); and
- HMRC Guidance INTM422000.
How long does it typically take to conclude an advance pricing agreement?
According to the most recent statistics from HMRC, the average completion time for an advance pricing agreements is approximately 33 months. However, the time taken can differ drastically depending on the parties involved and the subject matter of the advance pricing agreement.
What is the typical duration of an advance pricing agreement?
Advance pricing agreements typically have a five-year maximum term.
What fees apply to requests for advance pricing agreements?
There is no filing fee.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
In practice, advance pricing agreement applications are more likely to be successful if the transfer pricing issues are complex and there is uncertainty as to how the arm’s-length standard should be applied. HMRC also must be satisfied that negotiating the advance pricing agreement is a good use of its resources and that there is a high probability of double taxation without an advance pricing agreement in place.
HMRC strongly favours negotiating either bilateral or multilateral advance pricing agreements, except where:
- the relevant jurisdiction is not signatory to a tax treaty with the United Kingdom;
- a treaty partner has no established advance pricing agreement programme; or
- HMRC considers that there is little to be gained by seeking a bilateral agreement.
HMRC has also implemented monitoring and compliance measures once an advance pricing agreement has been successfully implemented. Taxpayers must provide an annual report accompanying a business tax return for the duration of the advance pricing agreement. The details that the taxpayer is required to include in the annual report are determined on a case-by-case basis.
Review and adjustments
Review and audit
What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?
Her Majesty’s Revenue and Customs (HMRC) has established an overarching transfer pricing group with specialist knowledge and skill, which is overseen by a transfer pricing board. The board monitors the work of HMRC in relation to transfer pricing.
The taxpayer’s charter, published by HMRC, sets out the rights taxpayers should enjoy, and HMRC’s expectations of the taxpayer. In addition, HMRC is guided by its internal manual in dealing with potential controversies, HMRC International Manual at INTM482040-482160. Additionally, the Code of governance for resolving tax disputes is in place to ensure that HMRC deals with all cases fairly.
Audits into transfer pricing issues, referred to as ‘enquiries’, involve the following three-stage process:
- At the selection stage, a risk assessment will be carried out in order to determine whether an enquiry is necessary – the relevant officers must have a business case to support an enquiry.
- The progress stage involves opening an enquiry by issuing a formal corporation tax self-assessment enquiry notice under the rules in Schedule 18 of the Finance Act 1998 (which generally require an enquiry to be opened within 12 months following the date on which a corporation tax return is filed).
- At the resolution stage, after sufficient information is made available and an analysis has been carried out, HMRC will form a view on the transfer pricing subject to the enquiry. If adjustments are required, HMRC may either proceed toward settlement or litigation against the taxpayer. It should be noted that the transfer pricing board is the only body with the power to decide whether to litigate.
HMRC endeavours to settle transfer pricing enquiries within 18 months; however, particularly complex cases may take up to 36 months. The average completion time for 2016-2017 was just under 30 months.
Most transfer pricing cases involve taxpayers seeking to show that a decision by HMRC is incorrect. Therefore, the formal question of where the burden of proof lies need not be addressed, as the court may accept either the taxpayer's or HMRC’s position, or arrive at a different conclusion as to the application of the arm's-length test. It is normally the taxpayer that presents a case first at an appeal hearing, and therefore the burden of proof theoretically lies with them; however, where the taxpayer has purportedly failed to submit a return or comply with a notice, HMRC must prove that this failure took place.
Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?
HMRC International Manual at INTM482040-482160, the taxpayer charter and the code of governance for resolving tax disputes (see above).
What penalties may be imposed for non-compliance with transfer pricing rules?
The transfer pricing penalty regime is the same as for other direct tax infringements. HMRC provides guidance on how these penalties are applied to transfer pricing in its International Manual. The penalty depends on how serious the non-compliance is considered to be and the degree of culpability of the taxpayer in any underpayment of tax.
A penalty may be due in the following circumstances:
- If an incorrect return is made and a business has been careless or negligent in establishing the arm’s-length basis for the return. The following standard maximum penalties will apply, based on the potential lost revenue, depending on the particular circumstances involved.
Reason for penalty
Type of inaccuracy
Maximum penalty payable
Giving an inaccurate return or other document
30% of potential lost revenue
Giving an inaccurate return or other document
Deliberate, not concealed
70% of potential lost revenue
Giving an inaccurate return or other document
Deliberate and concealed
100% of potential lost revenue
Inaccuracy discovered later but no reasonable steps taken to inform the relevant body
Treated as careless
30% of potential lost revenue
Understated assessment not notified
30% of potential lost revenue
Inaccuracy due to the deliberate behaviour of another person
100% of potential lost revenue
- If a business does not maintain the appropriate documentation necessary to demonstrate that it has made its returns on the basis that the terms of connected party transactions were considered to be on arm’s-length terms. The penalty for failure to keep or preserve records can be up to £3,000.
Penalties for non-compliance with country-by-country reporting range from £300 to £3,000. There is also a penalty of £60 for each day a taxpayer fails to provide information.
What rules and restrictions govern transfer pricing adjustments by the tax authorities?
Under UK transfer pricing legislation, HMRC may make primary adjustments, and in the case of UK-to-UK transactions, compensations or corresponding adjustments.
HMRC requires that the taxpayer make available all information and records it considers relevant to the tax in question. This power extends to information including electronically stored communications or other data, and HMRC is entitled to use this information when reaching its decision, making adjustments or during any formal litigation proceedings (subject to any legal or professional privileges that might prevent certain information being admitted as evidence).
HMRC does not use secret comparables when determining the arm’s-length price in an enquiry.
How can parties challenge adjustment decisions by the tax authorities?
Taxpayers may appeal decisions made by HMRC to the First-tier Tax Tribunal. The dispute may also be resolved through alternative dispute resolution or settlement. While this approach is encouraged by HMRC, the practice is still rare in the United Kingdom. If permission is granted, further appeals may be brought in the Upper Tribunal, Court of Appeal and Supreme Court.
Mutual agreement procedures
What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?
While not all tax treaties of which the United Kingdom is signatory contain the mutual agreement procedure provision, in practice this has not prevented HMRC from attempting to resolve a dispute with its tax treaty partner if an exchange of information article exists which allows for information to be provided as part of a discussion.
The only condition for requesting a mutual agreement procedure is that an action giving rise to double taxation has (or is likely to) occurred in the territory concerned, either within six years from the end of the relevant accounting period or the period as specified in the relevant treaty, whichever period happens to be longer. HMRC’s description of how it would normally expect a claim to proceed is set out in Statement of Practice 1 (2011).
The United Kingdom has also begun to include arbitration clauses in its tax treaties. These exist under the UK-France tax treaty, as well as tax treaties with Germany, the Netherlands and Switzerland. Further, it has opted to apply Part IV of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) to its tax treaties, providing arbitration measures which will apply with respect to tax treaties where both contracting jurisdictions have chosen to apply Part VI of the MLI.
The EU convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/463/EEC) may provide an alternative to the mutual agreement procedure under UK tax treaties, where residents of EU member states are potentially subject to double taxation. A mutual agreement procedure may be invoked under one of the United Kingdom’s tax treaties, under the European Arbitration Convention or both simultaneously.
Further, the EU Tax Dispute Resolution Mechanism Directive, adopted on October 10 2017, provides measures that aim to ensure taxpayers are able to resolve all disputes related to the interpretation and application of tax treaties. While this directive will become applicable in the European Union from July 2019, it is unclear whether UK taxpayers will have access to its benefits, due to the uncertainty surrounding the United Kingdom leaving the European Union.
What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
GAAR Sections 206 to 215 of the Finance Act 2013 introduced a general anti-abuse rule (GAAR) which empowers Her Majesty’s Revenue and Customs (HMRC) to counteract tax advantages which arise from abusive (rather than avoidance) schemes. The GAAR applies to:
- income tax;
- corporation tax;
- capital gains tax;
- the diverted profits tax;
- petroleum revenue tax;
- inheritance tax;
- stamp duty land tax;
- annual tax on enveloped dwellings;
- national insurance contributions; and
- the apprenticeship levy.
HMRC have also published GAAR guidance, namely Tax avoidance: General Anti-abuse Rule guidance.
Diverted profits tax In 2015 the United Kingdom introduced a diverted profits tax under Part 3 of the Finance Act 2015, in order to deter the diversion of profits from the United Kingdom by taxpayers that either:
- seek to avoid creating a permanent UK establishment that would bring a foreign entity into the charge of domestic corporation tax; or
- use arrangements or entities which lack economic substance to exploit tax mismatches, either through expenditure or the diversion of income within the group.
Diverted profits tax is charged at 25% on certain profits arising on or after April 1 2015 or 55% for UK ring-fence oil and gas operations, and 33% in cases where the diverted profits would have been subject to the UK banking surcharge.
HMRC has published guidance on the diverted profits tax to be read alongside the legislation.
Anti-hybrid rules The United Kingdom has introduced anti-hybrid rules in line with Base Erosion and Profit Shifting (BEPS) Action 2, which have been effective since January 2017. The rules apply to arrangements that involve:
- a hybrid instrument or hybrid entity; and
- a tax mismatch caused by the hybrid.
The anti-hybrid rules apply to taxpayers that pay corporation tax, including permanent establishments, and disallow a tax deduction that would otherwise arise. They apply where:
- an entity is directly involved in the hybrid mismatch; and
- there is an ‘imported mismatch’ – where the UK entity is not involved in the hybrid mismatch but it exists elsewhere in the group, and the UK arrangement is part of the same over-arching arrangement as that of the hybrid mismatch.
The United Kingdom is the first country to implement BEPS Action 2 fully and HMRC has recently published guidance on the new anti-hybrid legislation.
General anti-avoidance rules In addition to the above initiatives, various parts of the UK tax code have targeted anti-avoidance rules preventing taxpayers from being entitled to, for example, deductions for interest in certain situations.
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
The United Kingdom closely follows, and is a strong advocate of, the Organisation for Economic Cooperation and Development (OECD) BEPS Project. For example, the United Kingdom has:
- implemented the recommendations of Action 2, neutralising the effects of hybrid mismatch arrangements with effect from January 1 2017;
- implemented the recommendations of Action 4, restricting deductions for corporate interest expense with effect from April 1 2017;
- legislated to reform its patent box rules to conform with the modified nexus approach with effect from July 1 2016;
- adopted BEPS Action 2 (anti-hybrid rules) and Actions 8 to 10 (transfer pricing); and
- signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
Foreign company rules and mandatory disclosure rules are already under control, as recommended by Actions 3 and 12, respectively.
As a more immediate measure, with effect from April 2019, the government plans to introduce an extension to UK withholding tax in order to cover royalties paid in connection with sales to UK companies to no or low-tax jurisdictions, regardless of where the payer is located.
The government also has advocated for the standardisation of the transfer pricing documentation requirements in order to reduce the costs and demands of compliance for multinational enterprises.
In 2015 the United Kingdom introduced a diverted profits tax under Part 3 of the Finance Act 2015 (see above).
Is there a legal distinction between aggressive tax planning and tax avoidance?
See above in relation to the distinction between abusive tax schemes and tax avoidance.
What penalties are imposed for non-compliance with anti-avoidance provisions?
GAAR Under the GAAR a tax advantage gained from an abusive transaction can be counteracted and a penalty of 60% of the amount of the tax advantage can also be imposed. In addition, taxpayers are obliged to take the GAAR into account when completing a self-assessment return and will be subject to the usual penalties associated with failing to take reasonable care when completing a tax return if they fail to do so.
Further, those who have enabled the abusive transactions (eg, marketing or designing them) can be liable to a fine equal to the fee charged by the enabler.
Diverted profits tax See above for diverted profits tax penalties. Criminal penalties may also be applicable.
Disclosure of tax avoidance schemes rules Promotors and users of arrangements that are subject to the disclosure of tax avoidance schemes rules are liable for civil penalties of between £600 (for failure to notify HMRC of an arrangement within five days of the scheme being made available or implemented and charged per day) and £10,000 (for failure to include a scheme reference number on a relevant tax return).