HM Revenue & Customs indicated that the second tranche of “profit diversion compliance facility” (PDCF) letters will be issued soon—“nudge” letters that will encourage multinational entities (MNEs) to register for the PDCF and bring their cross-border tax affairs and arrangements up to date.
This second release of the PDCF nudge letters follows the initial success HMRC enjoyed when most of MNE recipients of the first tranche of letters issued in late January 2019, registered. Businesses need to look out for this correspondence and consider now how best to respond to HMRC’s strategy for addressing arrangements that are perceived to reduce UK taxable profits.
HMRC launched the PDCF in January 2019 after finding, in a high proportion of their investigations, that MNE’s tax arrangements did not reflect what was actually happening on the ground and that transfer pricing policies were not in accordance with the OECD Transfer Pricing Guidelines as clarified through the OECD base erosion and profit shifting (BEPS) project.
Registration for the PDCF enables MNEs to review and change arrangements—without the burden of an HMRC investigation in the review period—with proposals to pay any additional tax, interest, and penalties. In return, MNEs can expect a more efficient and controlled investigation and possibly more favourable penalty treatment from disclosing.
Although HMRC indicated businesses will not be nudged if they are being considered for investigation for profit diversion, HMRC periodically issued targeted nudge letters in small targeted tranches to some perceived high-risk businesses, encouraging them to consider registering.
Implicit in HMRC issuing nudge letters is that the failure to register will generally result in an HMRC investigation.
The first tranche of nudge letters allowed a 90-day grace period before such an investigation could start. It is expected the next tranche will do the same, and that most businesses nudged will continue to register for the PDCF.
Experience shows that this process can be challenging for many businesses, in that they need time to review their arrangements in light of the detailed PDCF guidance and decide what the best way forward is. Failure to react quickly could result in a more challenging engagement with HMRC, potentially including issuance of diverted profits tax (DPT) preliminary charging notices because HMRC typically has taken action before the expiration of the DPT time limits for initial accounting periods.
Investigations of businesses previously nudged (and that did not register) have already started, and HMRC said that the expectation is to follow-up the second tranche of letters even more quickly. Therefore, it will be critical for MNEs to look out for and appropriately react to the HMRC letters. MNEs will want to review HMRC’s PDCF guidance and not wait for a nudge, especially if the nudge does not come before they are investigated by HMRC.
Read a June 2019 report prepared by the KPMG member firm in the UK
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