HMRC launched 250 investigations into Transfer Pricing by UK corporates in the last year*, says Pinsent Masons, the international law firm.
Pinsent Masons says the tax affairs of UK corporates are a top priority for HMRC and particularly any reduction of UK taxable profits through incorrect Transfer Pricing.
Transfer Pricing refers to the necessary charges made between different parts of a multinational business for goods, services or intangible assets, including intellectual property. Tax rules provide that transactions between connected parties should be taxed as if they were on arm’s length terms. In recent years, multinationals have been accused of arranging their transfer pricing to minimise their tax liabilities in jurisdictions such as the UK.
HMRC believes large businesses may have underpaid a record £5.8bn through incorrect Transfer Pricing last year, up 51% from £3.8bn in 2015/16. However, the number of Transfer Pricing investigations opened in 2016/17 represents a fall on the 362 investigations launched in 2015/16.
Pinsent Masons says HMRC has been cracking down on Transfer Pricing for several years and has picked most of the easiest to win cases in this area through its investigations. HMRC is now focusing on fewer higher-value, more complex disputes. Figures released last year showed that the time taken to settle transfer pricing disputes has increased with disputes now taking on average two and a half years to settle.
Jason Collins, Partner at Pinsent Masons, says: “The fewer Transfer Pricing inquiries launched last year reflects the fact that HMRC is taking on more complex and bigger ticket disputes, rather than them taking a less aggressive approach.”
Pinsent Masons explains that even though HMRC conducted fewer investigations last year, it is not being less active in this area. Instead, it is using Diverted Profits Tax (DPT) investigations to challenge intra group transactions rather than Transfer Pricing investigations.
DPT was introduced in 2015 and is designed to deter activities that divert profits away from the UK so that they are not subject to corporation tax. HMRC’s yield from DPT inquiries was £281m in 2016/17, up from £31m in 2015/16. A DPT investigation can be settled by adjusting Transfer Pricing so more UK corporation tax is paid. DPT is paid at 25%, whereas corporation tax is only payable at 19%.
“HMRC is also now focusing more of its attention on DPT inquiries and this may be influencing the number of Transfer Pricing investigations its opens. Several major corporates have already been subjected to DPT inquiries.”