HMRC placing greater emphasis on transfer pricing compliance
Profit Diversion Compliance Facility launched in January to encourage multinationals to settle their tax affairs
The amount in fines imposed by HM Revenue & Customs (HMRC) on multinational businesses in relation to transfer pricing irregularities has jumped tenfold over the last two years, according to figures obtained by LCN Legal, the leading experts in intercompany agreements for transfer pricing compliance.
HMRC imposed £413,437 in fines in 2018/19, compared to just £45,600 in 2015/16.
LCN Legal says that while the amount in fines is still modest, the dramatic ramping up in the value of penalties over the last two years is evidence of a tougher approach by HMRC towards transfer pricing non-compliance.
According to LCN Legal, HMRC typically tries to reach a negotiated settlement in transfer pricing disputes with multinational enterprises and avoid imposing penalties. In the years from 2012/13 to 2017/18, HMRC secured £6.5 billion of additional tax by challenging the transfer pricing arrangements of multinationals. The tax haul increased from £504 million in 2012/13 to £1.6 billion in 2017/18. Fines are imposed in a small, albeit growing, minority of cases.
Paul Sutton, Partner at LCN Legal, comments: “Transfer pricing remains an area of growing focus not just for HMRC but for tax authorities around the world. HMRC has scaled up its capabilities in this area and is devoting more resources to scrutinising the transfer pricing arrangements of multinational businesses.”
LCN Legal says that the implementation of Country by Country Reporting, which requires multinationals to share data on the global allocation of income, profit, taxes paid and economic activity among the tax jurisdictions in which they operate has increased the level of transparency of their transfer pricing arrangements, thereby making it easier for HMRC to challenge them.
Paul Sutton says: “The filing deadline for the first Country by Country report was December 2017, which corresponds to the sharp jump in fines imposed by HMRC in relation to transfer pricing arrangements. It is likely that some multinationals had not adequately managed the risks associated with the introduction of Country by Country reporting and had failed to plan for the greater transparency their transfer pricing arrangements would be subjected to.”
LCN Legal points out that the launch of the Profit Diversion Compliance Facility this January, which is designed to allow multinationals using arrangements targeted by the Diverted Profits Tax to bring their tax affairs up to date, is further evidence of HMRC’s greater focus on transfer pricing compliance.
Paul Sutton says: “The Profit Diversion Compliance Facility is a form of what HMRC calls “co-operative compliance”. It wants to work with multinationals to put their tax affairs in order and is generally reluctant to impose fines. The increase in fines does suggest, however, that HMRC is increasingly prepared to use the stick in as well as the carrot.”
LCN Legal says that multinationals can reduce the risks associated with the greater focus their transfer pricing arrangements are under by putting in place inter-company agreements, which will support transfer pricing policies in the event of a challenge or audit by a given tax administration, and meet the group’s non-transfer pricing needs.
LCN Legal has launched an online course and toolkit of template intercompany agreements, as well as a new ‘fast track’ online tool, which helps multinational groups to create draft intercompany agreements. Paul Sutton is also the author of the recently published book ‘Intercompany Agreements for Transfer Pricing Compliance: A Practical Guide’.