After a slowdown in tax investigations during the pandemic, tax disputes are on the rise again and we expect this to continue. There are a number of reasons for this:

  • Governments need to increase their tax take to reduce public borrowing increases during the pandemic and energy-crisis.
  • There’s likely to be an international ‘race’ for additional tax revenues from BEPS 2.0.
  • Ever increasing reporting and tax transparency requirements mean tax authorities are receiving more data than ever.
  • Tax authorities are investing in and making better use of technology to analyse that data and make well informed resource-to-risk decisions.
  • Audits are being approached more aggressively with more focus on detailed fact finding and evidence testing.

KPMG’s latest report on Navigating the global tax disputes landscape found that transfer pricing (TP) issues were the most common type of dispute encountered in the past 12 months followed by interest expense challenges and indirect taxes.  There is often an interplay between these issues.

Preventing a TP enquiry

HM Revenue & Customs (HMRC) prefers multinational groups to fully disclose significant tax uncertainties or inaccuracies and to ensure compliance with tax law, and have stated they will work co-operatively, proactively and transparently with those groups to resolve any tax uncertainties and risks.

There are essentially four voluntary compliance approaches which can help prevent HMRC transfer pricing enquiries and diverted profits investigations.

1. Real-time working for large businesses[1]

Through the Business Risk Review process HMRC decide on a business’s overall level of tax compliance risk by considering the inherent risk the business represents (for example, its size, complexity, and the amount of change it is subject to) and whether the business effectively mitigates this risk through its behaviour.  Accordingly, how a large business approaches tax compliance and its openness with HMRC can change the assessment of tax compliance risks, including transfer pricing.

Some large groups proactively discuss the treatment of large or unusual items in their corporation tax returns with HMRC at a pre-filing meeting with the Customer Compliance Manager (CCM) and corporation tax subject matter experts supporting the CCM.  The Notification of Uncertain Tax Treatment regime for large businesses, which came into force on 1 April 2022, was intended to encourage more businesses to discuss areas of uncertainty with HMRC before they submit returns. 

In practice this might mean that when making changes to your TP model you explain what is changing and why to HMRC in advance.  Unlike an Advance Pricing Agreement (see below) this does not provide assurance that the transfer pricing for particular transactions is agreed by HMRC but effective real time dialogue can reduce the risk of an enquiry.

2. Advance Pricing Agreements

APAs are often the best tool available to multinational groups to obtain certainty in relation to complex and important cross-border transfer pricing arrangements

An Advance Pricing Agreement (APA) is a written agreement between a business and HMRC which determines the appropriate transfer pricing method to be applied to specified transactions for a set period and in advance of tax returns being made.

An APA provides assurance to the business that the treatment of those transfer pricing issues[2] will be accepted by HMRC for the period covered by the agreement, provided that the terms of the agreement are complied with.

In line with international best practice, HMRC will usually work with the tax administrations of other treaty partner countries to make bilateral, or multilateral agreements.  These agreements provide multinational businesses the greatest level of assurance in respect of the transfer pricing for transactions as they are binding on the tax administrations dealing with each side of the covered transactions and ensure that a business does not pay tax more than once on the same profits.

HMRC do not charge a user fee to APA applicants but some other tax administrations like the United States do.

A specific delegated competent authority team within HMRC are responsible for negotiating APAs and they are selective in which cases they accept into the APA programme.  The main criteria applied are:

  • is there real doubt as to how the arm’s length standard should be applied?
  • without an APA is there a high likelihood of double taxation?
  • do HMRC consider that the case is a good use of taxpayer and governmental resources?

HMRC have published a Statement of Practice[3] (SoP) which provides guidance on how it interprets the APA legislation and operates the UK APA Programme.  HMRC have recently made important updates to the SoP which address the interaction between APA applications and unresolved HMRC or overseas tax authority enquiries into prior period tax returns.  You can read about the updates here.

In practice HMRC will expect that businesses interested in an APA will meet with them to discuss their plans before presenting a formal APA application. 

Bilateral and multilateral agreements require discussion and negotiation between HMRC and its treaty partners and this means that in practice an APA may take several years to negotiate, with the timeframe being influenced by the complexity of the case and the responsiveness of other tax administrations and the applicant. 

HMRC statistics[4] show that APAs agreed in FY21 and FY22 had taken over 4 years on average to agree.  HMRC and the treaty partner often agree to extend the APA term where prolonged negotiations have consumed most of the original APA term.

Under some circumstances, and if all parties are willing, the agreed transfer pricing methodology under an APA may be “rolled back” to earlier periods. Interest in roll-back should be discussed in advance with HMRC at the pre-filing meeting as with other aspects of the plans.

HMRC’s most recent APA statistics show 40 new applications were made during the year ended 31 March 2022 (FY22), the largest number seen since FY16.  We expect that demand for APAs from large multinationals will continue to grow in the coming years given the importance of OECD-compliant transfer pricing to the new BEPS 2.0 global minimum tax measures[5] being rolled out and the other disputes trends noted in the introduction.  There are also reasons for optimism that APAs will be negotiated more quickly in the future as explained in this KPMG report.  Multinational groups should revisit their APA strategy in light of this changing environment.

3. Profit Diversion Compliance Facility

The Profit Diversion Compliance Facility (PDCF) was launched by HMRC in January 2019 and, in essence, provides taxpayers with an alternative to an HMRC enquiry to bring their tax affairs up to date.

The facility was intended to assist multinational groups in correcting transfer pricing irregularities, particularly those irregularities arising from facts diverging from the fact pattern assumed in the group’s transfer pricing analysis, or from transfer pricing policies which are inconsistent with the guidance and clarifications in the Report on BEPS Actions 8 to 10 (as adopted in the 2017 OECD Transfer Pricing Guidelines).

To date the vast majority of PDCF registrants have been businesses encouraged by HMRC to register (by so called "nudge letters") where HMRC's ongoing risk analysis indicated they have a combination of features commonly associated with profit diversion.  These taxpayers were, in effect, being given a choice between registering (within 90 days) and having an enquiry.  Around two thirds choose to register.  There is no user fee for the PDCF.

Of the businesses who have received nudge letters to date, there has been a relatively balanced split between large and mid-sized businesses[6] across a range of sectors (including financial services).  Businesses with a foreign parent are heavily represented but UK-headed groups have also been issued nudge letters.  Mid-sized businesses do not have a CCM, making real time working less accessible, and they often express surprise on receiving a nudge letter.

There have been some instances of spontaneous registrations by taxpayers.  It should be noted that it is only possible to register if there is no pre-existing open HMRC enquiry on profit diversion.  A taxpayer with an enquiry on an unrelated matter may register.

PDCF imposes additional obligations on participants, including preparing a 6-part Disclosure Report (and supporting evidence) that must generally comply with the prescriptive conditions set out in Chapter 4 of the PDCF guidance[7] and contain a declaration signed by a senior responsible officer, and a proposal for the amount of tax, interest and penalties payable.

The main benefits of using the facility for the taxpayer are intended to be:

  • Greater control over the process of addressing the issues: the taxpayer can manage its own internal processes around what evidence to gather, who is interviewed and how the analysis is presented.
  • Accelerated process: cases are being resolved significantly quicker on average than HMRC enquiries.
  • Reductions in potential penalties including treatment of disclosures as unprompted.

The main benefits of the PDCF for HMRC are intended to be that revenue is accelerated significantly compared to enquiry resolution and the process places less demand on HMRC resources than a diverted profits investigation typically would.  HMRC have reported that over £516 million additional revenue has been secured from resolution proposals and changes in customer behaviour[7].

HMRC statistics[8] indicate that 96% of final reports have been accepted.  Our experience to date with the PDCF has been positive, we have found that HMRC respond appropriately to well written reports and will accept nil adjustments where appropriate.

There are some important differences between the PDCF and an APA:

  • The PDCF only covers previous accounting periods for which returns have been filed and which are within the relevant time limits for HMRC to assess.
  • The PDCF does not provide certainty in relation to future years although HMRC have stated that where there has been no significant change in circumstances or conditions a return made on the basis agreed under the PDCF proposal is likely to be looked upon as presenting a low tax risk[9].
  • It is a unilateral discussion with HMRC. Whilst the PDCF does provide certainty that HMRC have agreed the historical transfer pricing treatment for the issues and accounting periods covered by the report, it does not provide any assurance that the adjustment will be accepted by tax authorities on the other side of the transaction.  A Mutual Agreement Procedure (MAP) is required afterwards to eliminate any double taxation.

Recent updates to HMRC guidance on APAs indicates that HMRC practice is to not accept an APA request where there are unresolved prior year HMRC enquiries into the proposed covered transactions or other transactions that may materially impact on the proposed covered transactions, irrespective of whether the APA is seeking a roll back to those periods or not.  This also extends to cases where HMRC have written to a business asking them to consider registering for the PDCF before a formal interest in an APA has been expressed.

It is still early days in terms of seeing how successfully PDCF settlements are upheld in MAP, but HMRC are conscious of the MAP dimension in their approach to PDCF cases and PDCF cases are subject to similar HMRC governance procedures as would apply to an enquiry settlement.

PDCF nudge letters have not replaced transfer pricing enquiries and HMRC will determine where they feel a nudge letter is the appropriate first action or to simply issue an enquiry notice without any warning.  The PDCF guidance itself is a very useful barometer for assessing the risk of a HMRC diverted profits investigation being started.  Once HMRC opens a transfer pricing (or diverted profits investigation) it is not possible to register for the PDCF in respect of the same issue.

Where the PDCF hallmarks are relevant, some businesses have spontaneously registered for the PDCF rather than waiting for HMRC to enquire, or applying for an APA.  The motivation may be wanting to reach a settlement on identified transfer pricing risks quickly ahead of a future exit or other planned business changes.  Achieving low risk status for the future may be good enough or the transfer pricing uncertainty may relate to a transaction not expected to recur in the future.

The key take-away here is not to discount the PDCF option just because you have not had a nudge letter.  One mid-sized business who registered for the PDCF commented: “[The PDCF process] cemented our relationship and now HMRC have a much better understanding of what the business does and how it works”.[10]

4. International Compliance Assurance Program

The International Compliance Assurance Programme (ICAP) is a voluntary coordinated programme for risk assessment of taxpayer positions on arm’s length transfer pricing and permanent establishment profit attribution.  ICAP is focused on large multinational groups who are subject to Country by Country Reporting requirements.

It is intended to facilitate open and cooperative multilateral engagements between multinational groups and tax administrations in jurisdictions where they have activities.  There are over 20 participating Tax Administrations including HMRC in the UK and the US Internal Revenue Service (IRS).  Unlike APAs, participating tax administrations do not charge user fees for ICAP.

ICAP does not provide the same level of certainty as an APA.  It is intended to give comfort and assurance where tax administrations participating in a multinational group’s risk assessment consider a covered arrangement to be low risk, or to identify areas that need further attention outside ICAP.

In principle ICAP may cover a variety of risk and complexity levels, but as the procedure is based on a standard documentation package it may be less suited to highly complex cases (where an APA may be appropriate).

The ICAP risk assessment can cover multiple fiscal years and, if successful, HMRC and other participating tax administrations would provide confirmation of the covered arrangements that are considered to be low risk, with a statement that it is not anticipated that compliance resources will be dedicated to a further review of these risks for a defined period (2 years in cases we have seen).

Feedback has been largely positive, with multinational groups recognising the value of being able to have early engagement with a number of tax administrations at the same time.  As an example, a case involving HMRC and 10 other participating tax administrations was resolved in approximately 9 months.  

The suitability of a case for ICAP will be influenced by:

  • The willingness of the multinational group to engage in a transparent way and ability to commit resources to the project over the estimated six-month risk assessment period.
  • The scale and complexity of the relevant transactions – for example, whether it is feasible to perform a high-level risk assessment.

HMRC will provide an explanation if they decide not to take on a case. For example, multinational groups with relevant transactions under enquiry in a participating territory may not be accepted.

Demand for ICAP may be impacted by the OECD’s work on Pillar 1. Amount B is aimed at simplifying and streamlining the application of the arm’s length principle to baseline marketing and distribution activities.  There is likely to be overlap here with the types of transfer pricing issues where ICAP may be beneficial and there may be an opportunity for ICAP to evolve and act as a multilateral mechanism for obtaining assurance on the satisfaction of the Amount B scope conditions.

Another notable development is that earlier this year the IRS Large Business & International division issued a memorandum implementing new internal procedures for IRS review of APA applications and prefiling memoranda for acceptance into the APA program.  The review procedures require consultation between the Advance Pricing and Mutual Agreement program (APMA), which handles APA and competent authority cases, and the IRS Transfer Pricing Practice, which includes the transfer pricing examination function.  The consultation is meant to ensure that the case is handled through the workstream best suited to providing tax certainty under the circumstances, so the IRS may seek to steer some taxpayers toward ICAP as an alternative to an APA.


There are a number of preventive measures which multinational groups can take, either individually or in some cases in combination, to reduce the likelihood of HMRC opening a transfer pricing enquiry.  Which approach fits best depends on a number of factors including the complexity of the issues and countries involved, the size of the business, the importance of risk mitigation for the past versus assurance for the future, and time and cost constraints.  Whichever approach is adopted, positive outcomes depend on taxpayers and tax authorities behaving in a transparent and co-operative manner and being able to reach compromise when necessary.

Our experience from PDCF and enquiry cases is that the evidential requirements for supporting transfer pricing positions are significant and trying to compile this evidence several years after the event can be challenging and onerous for the business.  So whichever route is chosen, to be on the front foot, it is important to establish the facts properly at the outset and actions like undertaking a value chain analysis can provide a solid foundation for all the dispute prevention measures described above.

If you would like to discuss your transfer pricing dispute prevention and resolution strategy, we would be pleased to hear from you.  Our core team of transfer pricing controversy specialists have extensive experience in transfer pricing dispute prevention and resolution gained in tax authority, industry, and advisory roles.  We work seamlessly with our award-winning tax disputes team in KPMG Law and disputes specialists across our global network of member firms.

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[1] Around 2,000 of the largest groups operating in the UK have their tax compliance monitored by HMRC’s Large Business Directorate and each group are assigned a Customer Compliance Manager (CCM).

[2] Note that a separate Advance Thin Capitalisation Agreement (ATCA) process applies for transfer pricing of funding.  An ATCA is an agreement between a business and HMRC which sets out how the transfer pricing rules apply to funding issues, including the appropriate levels, terms, and conditions of debt financing between connected parties.  ATCA’s are always unilateral, meaning they are agreed between the taxpayer and HMRC and have no impact on how funding issues may be treated by another affected country.

[3] See HMRC International Manual at INTM 422000 et seq.

[4] Transfer Pricing and Diverted Profits Tax statistics 2021 to 2022 - GOV.UK (

[5] Including Qualifying Domestic Minimum Top-up Tax rules being introduced by countries

[6] Large and mid-sized refers to whether the businesses’ UK tax affairs are handled by the HMRC Large Business Directorate or the HMRC Wealthy & Mid-sized Business Directorate.  In practice many “mid-sized” businesses for these purposes are part of large non-UK headed groups which have Country by Country Reporting obligations (EUR 750m consolidated global revenue).

[7] HMRC Profit Diversion Compliance Facility - GOV.UK (

[8] Transfer Pricing and Diverted Profits Tax statistics 2021 to 2022 - GOV.UK (

[9] Profit Diversion Compliance Facility - GOV.UK ( see 2.10 Post settlement

[10] Customers' experience of the Profit Diversion Compliance Facility and Diverted Profits Enquiry Process  - GOV.UK (