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UK: Effects of diverted profits tax on transfer pricing adjustments

UK: Effects of diverted profits tax

HM Revenue & Customs (HMRC) published transfer pricing and diverted profits tax statistics for 2016/17 showing a massive increase in tax adjustments.

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After a three-year gap, HMRC started again publishing statistics on transfer pricing enquiries and adjustments, and related issues. This year, statistics on the diverted profits tax (DPT) were added. The headline statistic is a 90% increase in transfer pricing adjustments over the prior year to £1.6 billion. Given the very high level of ongoing enquiries, and the introduction of country-by-country (CbC) reports, tax professionals do not expect this level of adjustments to be a one-off situation.

Implications of diverted profits tax

The HMRC statistics reflect a large increase in the number of transfer pricing enquiries, often conducted in conjunction with a DPT enquiry and often covering a number of years. The introduction of DPT has given HMRC an additional tool to use in transfer pricing disputes, as well as being a separate taxing opportunity in its own right.

The length of enquiries is also increasing, with the average age of settled enquires now just short of 29 months. This reflects the increasing complexity of cases (including DPT implications) and increased levels of governance within HMRC. It is possible, however, that this figure may drop in 2017/18, as HMRC examiners have been accelerating enquiries this year in order to work within the window for DPT notices in respect of the first year of DPT.

The DPT statistics show a yield very closely aligned to the anticipated yield on its introduction, at £281 million for 2016/17. This amount reflects actual DPT assessments, additional corporation tax levied as a result of HMRC intervention in respect of potential DPT charges, and behavioural change when businesses have modified their transfer pricing arrangements in order not to suffer a DPT charge. It is however unclear how this last element has been calculated by HMRC.

APAs, MAPs, ATCAs

The statistics also include details on advance pricing agreements (APAs), mutual agreement procedures (MAPs) and advance thin capitalisation agreements (ATCAs).

On APAs the statistics show a decrease in the number of applications, and APAs agreed in the year, along with an increase in the number of applications rejected. They also show a similar timeframe for reaching agreement to the prior year, which was a large increase on 2014/15. The longer timeframes reflect the need to clarify the DPT position at the beginning of the process, and the increased governance at the end. It is expected that APAs will continue to be a useful tool for taxpayers, albeit with a greater size and complexity threshold following the issue of a revised Statement of Practice last year. Similarly ATCAs have seen a reduction in the number of applications, along with an increase in the time to resolve.

MAP statistics show a concerning drop in the number of cases resolved alongside an increase in claims made and the length of time to resolve them. This is expected to be exacerbated in future years, as tax authorities take different views on the recent revisions to the OECD Transfer Pricing Guidelines, and gain access to greater levels of data through CbC reporting.

KPMG observation

These statistics are not unexpected, and reinforce the view that transfer pricing and DPT will be a major focus for HMRC in the coming years, and taxpayers need to be fully prepared for potential enquiries.

 

Read a September 2017 report prepared by the KPMG member firm in the UK

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