On 10 January 2019 HMRC announced a new Profit Diversion Compliance Facility (PDCF) to encourage multinational enterprises (MNEs) to make voluntary disclosures about mistakes or failures to notify in respect of profits diverted from the UK. Full details of the announcement can be found here.
Why have HMRC announced a new Profit Diversion Compliance Facility?
HMRC have stated that the main reasons for launching the facility are that some MNEs have:
- made incorrect assumptions, or not implemented transfer pricing (TP) arrangements as originally intended or declared to HMRC; and/or
- adopted TP policies which are not in accordance with the OECD’s Transfer Pricing Guidelines.
The deadline for voluntary disclosure under this facility is 31 December 2019. One of the conditions for use of the facility is that the underpaid tax disclosed must be paid at the time of submission. There is no amnesty element as it regards the tax payable, and disclosure does not provide immunity from criminal investigation. However, HMRC will treat the disclosure as ‘unprompted’ for the purposes of considering penalties, and has stated that it is ‘unlikely’ to start a criminal investigation for a tax-related offence if full and accurate disclosure is made.
Risks identified in the PDCF
The PDCF highlights the risks created by intercompany agreements which do not correctly reflect the substance of the underlying arrangements, and the use of ‘comparables’ (particularly as regards royalties) which are not sufficiently comparable to the related party licence / agreement under review.
Other arrangements specifically identified by the PDCF as indicating potential risks include:
- Commissionaire structures
- Limited risk distributors
- Toll or contract manufacturing arrangements
- Contract research and development arrangements
- Sales and marketing entities performing key account management functions
- Licensing of intangibles
This new disclosure facility emphasises the need for genuine substance in TP policies, and the need for those policies to be accurately implemented, including through appropriate intercompany agreements.
What MNEs with a tax presence in the UK should expect
We expect that many MNEs will receive so-called ‘nudge’ letters from HMRC, encouraging them to consider registering for the facility. Irrespective of whether they receive such letters, MNEs should review both the design and implementation of their TP policies and change them if appropriate.
After the PDCF closes on 31 December 2019, HMRC can be expected to launch investigations into those companies which it has identified as being at risk and which have not made use of the facility.
Clearly, if action is required to correct inappropriate TP policies or inaccurate implementation through inappropriate intercompany agreements, corporates should not wait until 31 December to correct it. One of the key functions of intercompany agreements is to allocate risk contractually, and the OECD’s TP guidelines are clear that risk cannot be allocated retrospectively. The longer issues go uncorrected, the greater the MNE’s exposure to adverse TP adjustments, penalties and potential criminal sanctions.
If you are concerned about TP policies of any particular MNE and whether they have been correctly implemented through appropriate intercompany agreements, email LCN Legal at email@example.com or call us on +44 20 3286 8868 to arrange a consultation or a 'traffic light' review of your existing intracompany agreements.