UK Tax Authority Launches Facility to Encourage Multinational Transfer Pricing Compliance
HMRC has launched a new initiative designed to encourage taxpayers into compliance with the 2015 diverted profits tax, or “DPT”. Multinational enterprises with undisclosed DPT or related transfer pricing liabilities are encouraged to register for the Profit Diversion Compliance Facility and submit a detailed report and proposal to HMRC. In return, the taxpayer will benefit from an open and collaborative process, accelerated review timelines, an experienced team of HMRC specialists, and the possibility of mitigated penalties.
Since the facility was announced in January, HMRC has been issuing waves of “nudge” letters to certain high-risk enterprises, calling their attention to the facility and inviting them to register. Even if the taxpayer has not received such a letter, enterprises that have transfer pricing concerns should consider voluntarily registering for the facility, which offers certain advantages over a wait-and-see approach. According to HMRC, they will open investigations more quickly into those who do not register for the facility.
The DPT, which came into effect 1 April 2015, was enacted as part of an effort to discourage multinational companies from shifting UK profits to offshore tax havens. DPT is imposed at a 25% main rate, 6% higher than the current UK corporate tax rate, on profits considered to be artificially diverted from the UK.
As the corporate tax rate for UK oil and gas activities is higher than for other activities (30% as opposed to 19%), the corresponding DPT rate for such activities is also higher, but disproportionately so at 55% (i.e. 25% more than the applicable base rate). Although DPT is generally designed to counteract profit shifting to offshore tax havens, it could also potentially apply to domestic transactions in the oil and gas sector which artificially shift profits from the oil and gas tax rate to the lower main rate.
On 10 January 2019, HMRC rolled out an initiative designed to encourage multinational enterprises (“MNEs”) and other businesses that may be concerned about compliance with DPT to work collaboratively with HMRC to reach a resolution on international tax planning matters, for both past transactions and certainty in moving forward. The Profit Diversion Compliance Facility allows a taxpayer to proactively conduct an investigation into its transfer pricing compliance and create a report with recommendations to HMRC on its current or an amended position. HMRC’s goal is to respond to the report within three months of submission, and to “work co-operatively, proactively and transparently with MNEs to resolve any tax uncertainties and risks.”
Benefits and Considerations:
According to HMRC, the facility gives MNEs:
- The chance to bring their tax affairs up to date openly, efficiently and without investigation by HMRC if a full and accurate disclosure is made;
- Certainty for the past and a low risk outcome for profit diversion in the future;
- An accelerated process in which an experienced team of DPT specialists will aim to respond within 3 months of submission;
- The ability to manage their own internal processes around what evidence to gather, who is interviewed, what comparables are used (if any), and how the analysis is presented; and
- Lower minimum penalties if HMRC has not already started an investigation into profit diversion.
In deciding whether to register for the facility, MNEs should consider the following:
- whether they have susceptibility on transfer pricing strategies, or other issues of concern that could be solved by participation;
- whether they have the resources to prepare and submit a report that is likely to be accepted immediately or with little follow-up by HMRC;
- whether they have current and robust transfer pricing methodologies that can be supported through both documentation and an assessment of what happens “on the ground”; and
- whether there are other tax matters likely to rise to the surface during the investigation and evaluation by HMRC.
There is a deadline involved: To be eligible for the mitigation of certain penalties, the taxpayer must register for the facility by 31 December 2019. V&E’s UK-based Tax team can help MNEs evaluate whether they would benefit from participation in the facility.
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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.