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HMRC introduce Profit Diversion Compliance Facility

HMRC introduce Profit Diversion Compliance Facility

HMRC introduce a new facility to empower taxpayers with incorrect or out-of-date transfer pricing to bring their tax affairs up to date.

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Daniel Head

Partner, National Head of Transfer Pricing in the UK

KPMG in the UK

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Despite the introduction of the Diverted Profits Tax (DPT) in 2015, HMRC maintain that there remain a large number of taxpayers with tax arrangements that are not consistent with the OECD’s response to BEPS Actions 8-10 (which required Transfer Pricing Outcomes to be in line with value creation). Therefore, HMRC have developed the Profit Diversion Compliance Facility to encourage taxpayers to make the necessary changes to their transfer pricing policies (and pay any historical tax, interest or penalties due) to bring their tax affairs up-to-date in a speedy, collaborative and controlled manner.

What is the Facility?

The Facility gives multinationals with high-risk transfer pricing or DPT arrangements the opportunity to bring them into line with UK legislation without prompting by HMRC. Although the Facility is primarily targeted at taxpayers with arrangements potentially subject to DPT, this is not a prerequisite nor is an analysis of whether DPT applies. Businesses will have the opportunity to register with HMRC, six months after which they will be required to submit a report setting out proposed historical liabilities and go-forward transfer pricing arrangements.

Who is affected?
Any taxpayer demonstrating ‘profit diversion’ risks is affected. These may include taxpayers with the following indicators:

  • Contractual allocation of risk inconsistent with the control of such risk;
  • Fragmentation of valuable integrated functions into standalone low value-adding functions priced individually;
  • Important regional functions (e.g. EMEA HQ) taking place in the UK where the profits due may be routed to an overseas entity in a low tax territory contributing minimal related functionality;
  • Key sales functions in the UK, but with profits routed to an overseas entity in a low tax territory contributing minimal related functionality;
  • Profit shifted via supply chain to low substance entities with limited functionality in low tax jurisdictions (e.g. procurement hubs);
  • High value-adding R&D services performed in the UK remunerated on a cost plus basis (especially if patent box / R&D expenditure credits are also claimed); and
  • Intangible transactions involving low tax jurisdictions with limited functionality.

HMRC have indicated that taxpayers it considers ‘high risk’ may receive a ‘nudge’ letter. Recipients of such letters will be strongly encouraged to take advantage of the Facility or risk an HMRC investigation. Taxpayers that do not receive such a letter should not take this to mean that HMRC will not enquire.

Why should businesses consider the Facility?

If businesses make a full and accurate disclosure, pay those liabilities and fully cooperate, HMRC will not start an investigation into potential DPT or corporation tax liabilities. This gives rise to two major benefits, notably:

  • Reduced/no penalties if the business took reasonable care and/or failed to notify potentially being within scope of DPT earlier and consideration of reduced penalties if the business had acted carelessly (i.e. not considered BEPS Action Points 8-10), on the basis that full and accurate disclosures are made in accordance with the Facility; and
  • Allowing businesses to quickly bring tax matters up to date, including DPT issues and a wider range of related issues, in a controlled, collaborative and efficient way (rather than an HMRC enquiry which could involve issuance of DPT notices and discovery assessments). The accelerated process would give certainty for the past and a low risk outcome for profit diversion in the future.

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