Since its introduction in 2019, the PDCF has been used by more than 100 multinational groups to bring their international tax affairs up to date. KPMG in the UK has supported over 20 groups in successfully addressing risks within the PDCF. In general, the PDCF process has worked better than an enquiry would have been expected to, although parties considering registration should weigh up all options; and indeed, HMRC’s updated guidance makes that clearer.
We expect the PDCF to continue in a similar way but potentially with more spontaneous registrations prompted by HMRC ramping up their compliance efforts in this area, publishing extensive practical guidance on common transfer pricing risks and hiring more International Specialists. HMRC’s risk profiling capabilities are also due to get a significant boost from access to transactional data for circa 75,000 businesses that are in scope for the new International Controlled Transactions Schedule, and associated investment in technology infrastructure.
PDCF reports were already expected to cover, as relevant to the specific case, all cross-border/international tax risks including transfer pricing, which was generally the core issue. In that context, our view is that the update is a very useful clarification of what already occurs in practice where historical transfer pricing risks are resolved in collaboration with HMRC via the facility. This clarification is particularly useful for those businesses considering spontaneous registration, but who would not want to risk any perception that they had any profit diversion hallmarks.
Historically the vast majority of PDCF registrants have been businesses nudgedto do so by HMRC. Such nudges were highly targeted, and recipients faced a practical choice, once nudged, of registering or dealing with an HMRC investigation. Unsurprisingly many chose to register but they commonly did so, in our experience, without any concern about DPT potentially being in point. Rather, they generally preferred the greater control and shorter timeline1 that the PDCF was designed to deliver along with the prospect of unprompted treatment for any penalties. The greater control from the PDCF is around the timeline for doing the work and its focus, and greater control on what specific evidence is collected and how (to avoid business disruption and the risk of ‘fishing expeditions’).
One thing HMRC may now be signalling is that the risk assessment they do when deciding who to nudge to register for the PDCF may be changing. And that they want, and expect, more spontaneous registrations in light of the detailed guidance on common transfer pricing risks in GfC7 (which is referenced in the updated TP&PDCF guidance) and the wider scope of the facility.
The updated guidance helpfully clarifies other options:
- The transfer pricing Guidelines for Compliance route for simple or straightforward errors warranting voluntary disclosure; and
- An Advance Pricing Agreement (APA) where there is considerable difficulty in determining the method by which the arm’s length principle should be applied. It should be noted that a bilateral APA is generally only feasible where the counterparty jurisdiction has a fully functioning APA programme, ideally with rollback provisions. The guidance also notes that APAs are for those not nudged to register with the PDCF beforehand on the issue – any businesses under HMRC enquiry on the issue or nudged need to conclude on the historical periods before HMRC will consider an APA request.
The guidance highlights the availability of a discussion with HMRC on the option most suitable. Some businesses may prefer an anonymous discussion first, after taking professional advice on the pros and cons and undertaking a risk assessment.
Elsewhere it is as business as usual under the TP&PDCF with the core features remaining the provision of a formal report to HMRC supported by appropriate evidence. Core issues typically in scope remain those such as whether:
- Excessive reliance has been placed on contractual allocation of risks without sufficient regard to the location of control or other value-driving activities;
- Incorrect assumptions have been made about the ‘facts on the ground’ and conduct of the parties;
- Transfer pricing policies have been implemented as intended and are consistent with the OECD Transfer Pricing Guidelines; and
- Inappropriate comparables are relied upon.
It should be noted that the TP&PDCF’s demanding evidence requirements function to ensure that any Mutual Agreement Procedures (MAPs) that follow the PDCF settlement have a well-founded UK adjustment for the Competent Authorities to consider. An expansion of the cases appropriate for the TP&PDCF and of spontaneous registrations will be expected to lead to a growth in the number of MAPs linked to TP&PDCF.
Recommended actions include:
- Proportionate review of transfer pricing policies and cross border arrangements against HMRC’s transfer pricing Guidelines for Compliance and TP&PDCF guidance;
- Review of data sources, documentation and evidence to be audit and ICTS-ready; and
- Proactive management of any potential historical exposure identified.
