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07 August 2018 UK Tax Authority releases transfer pricing and diverted profits statistics Figures released by HM Revenue & Customs (HMRC), the United Kingdom (UK) Tax Authority, on 31 July 2018 showed it raised £1,682m from transfer pricing (TP) adjustments in the tax year 2017-18. This was corporation tax either directly from TP adjustments or as result of "behavioural change" across the large business population triggered by the diverted profits tax (DPT). The tax raised is slightly above the figure for 2016-17 (£1,618m) and is a historic high, reflecting the current environment for the UK and indeed international TP controversy. HMRC's figures also show that TP enquiries are taking longer than ever before, with the average age of open enquiries now at 30.4 months. The longer processing time may be affected by resourcing, but is more likely due to governance procedures enforcing more rigorous fact finding and ensuring a paper trail in support of any settlement agreement. At the same time, fewer taxpayers are seeking and achieving certainty through the Advance Pricing Agreement (APA) program, with applications and acceptances for APAs dropping to a record low. This is the result of the revised entry criteria with the bar being effectively raised and severely limiting the ability of most taxpayers to get into the program even where there is a willing fiscal authority on the other side of a bilateral APA. As the APA and Mutual Agreement Procedure (MAP) programs are resourced from the same pool of staff there are potential limitations on APAs as a result of ensuring proper resourcing for the MAP program. During 2017-18, HMRC raised £388m from DPT (up from £281m in 2016-17), with £219m of this coming from DPT charging notices and the rest from corporation tax resulting from behavioral change. Taken together with the overall figures on TP adjustments, this reinforces the position that DPT strengthens HMRC's ability to achieve enhanced TP settlements. As might be expected from the increased tax yield, HMRC has also ramped up its activity in relation to DPT preliminary notices, issuing 200 preliminary notices to 28 businesses (indicating that notices were sent to multiple entities within those 28 groups). Some businesses appear to have made successful representations to HMRC following receipt of these notices as 190 charging notices were issued to 22 businesses, indicating that challenge at this stage can be worthwhile for taxpayers. Although HMRC has stated that it has increased the number of staff dealing with international tax risks to 365 full time equivalent staff, this cannot be compared directly to figures quoted for earlier years as the staff numbers were previously quoted for TP specialists only. The increase in staff numbers has seen the average age of settled TP enquiries drop to 24.7 months from 28.8, but as noted above the average age of open enquiries is now at a record length of 30.4 months. The longer processing time is consistent with our experience that enquiries are now much more in-depth and resource-intensive for businesses as HMRC seeks significant quantities of information directly from taxpayers and through exchange of information from other fiscal authorities as well as from third parties such as suppliers and customers of the business, adding to the complexity and time elapsed for enquiries. Despite these headwinds, HMRC's statistics suggest fewer taxpayers are applying for APAs to try to achieve tax certainty. Only 16 APA applications were made during 2017-18 (down from 32, and far below the 66 made in 2014-15). The statistics do not reveal whether there were more expression of interest meetings where entry into the program was refused without an application being made. Of the 16 applicants, 6 were then rejected (a record) leaving only 10 APA applications accepted in 2017-18. The level of admissions is far below historic levels and the levels seen in other countries and seems to be well below the level of demand from businesses in the UK, perhaps resulting from taxpayers not passing the strict criteria set out in revised Statement of Practice on APAs published in November 2016. In the past, the APA route has been the recommended route to gaining international tax certainty, but the APA program in the UK now seems to offer businesses limited benefit over the revived option of real-time working to discuss TP issues with HMRC. However, it should also be considered that real-time working offers comfort for one tax year only (and some protection against discovery assessments in future), rather than the longer span of up to five years for an APA. Overall it seems likely that the low numbers for accepted APA applications will be seen as unsustainable in the long term as businesses seek clarity from tax authorities on their TP positions. Advance Thin Capitalization Agreements (ATCAs) are a form of unilateral APAs for financial transfer pricing, and in common with all APA applications and with unilateral tax agreements these are also falling out of favor. It is worth noting that HMRC agreed only 79 ATCAs in 2017-18 against a high of 213 in 2014-15. Those that were agreed took on average 17.5 months, again a record length of time. With APAs also taking a record 37.1 months on average to agree, this shows the complexity and difficulty of achieving certainty through rulings. The impact of the Corporate Impact Restriction (CIR) on ATCAs has not been commented on by HMRC, but we note that an ATCA remains in place for the agreed period of up to five years while the CIR needs to be reassessed each year. In this respect, ATCAs still have value for taxpayers where they can be agreed. Another encouraging development has been HMRC's recent willingness to consider bilateral APAs in suitably large financial transactions with strong treaty partners such as the Australian Tax Office, and the United States Internal Revenue Service. All of the above points towards an increasingly complex international tax landscape and it comes as no surprise that the number of cases entering into the MAP program to seek relief from double taxation has jumped from 80 to 103 in 2017-18. It is good news for businesses that 71 cases were resolved (up from 36), showing the value in making MAP applications and reflecting the Organisation for Economic Co-operation and Development's views in their peer review of MAP that the UK is a good treaty partner with a well-resourced MAP team. Following the trends outlined above, MAP cases now take longer to resolve (at 27.5 months on average, up from 24.4), but the time is down on historic highs reflecting how seriously HMRC takes its MAP obligations and a transfer of resources from APA to MAP. Our experience suggests that the UK generally continues to take a principle-based approach but some instances of pragmatic acquiescence to achieve a quick settlement have been noted. On a positive note, HMRC has reaffirmed its commitment to arbitration where MAP has not led to agreement within a defined timescale, giving businesses the benefit of certainty within a reasonable time frame. It is clear that international TP controversy continues to be a key area for businesses to monitor and to be aware of the changing world of tax transparency and cooperation. HMRC has referred to County-by-Country Reports (CbCR) becoming available to support its international tax risk assessments prior to launching transfer pricing or DPT enquiries. A globally consistent message is therefore important, and a proactive approach to risk management is essential. Controversy management must be included when designing the tax operating model, for example by considering how the international tax model can be optimized for effective MAP claims. In this way, businesses can prevent, manage and resolve international tax controversy. Document ID: 2018-5954 |
