UK: Transfer pricing statistics (FY 2021)
HMRC statistics reveal an increase regarding transfer pricing risks of multinational companies.
Statistics reveal an increase regarding transfer pricing risks of multinational companies
Statistics published by HM Revenue & Customs (HMRC) covering the 12-month period ending 31 March 2021 (FY 2021) show a revenue increase in the yield from HMRC transfer pricing casework—a 49% increase from FY 2020, for a total of £2.162 billion. This is the first time this figure has exceeded the £2 billion barrier.
The statistics in the HMRC report show important trends for multinational companies to consider when examining their transfer pricing risk management strategy.
HMRC included for the first-time data regarding the profit diversion compliance facility. The statistics also provide clear evidence of the challenges in achieving timely resolution of transfer pricing uncertainties through traditional mechanisms—such as bilateral advance pricing agreements (APAs), HMRC enquiries, and treaty mutual agreement procedures (MAPs).
Tax professionals believe that the data and statistics may encourage taxpayers to consider making unprompted registrations in the future, particularly given that it is taking more time to settle HMRC enquiries.
The HMRC report shows an increased transfer pricing compliance yield, despite fewer enquiries being settled in FY 2021 (compared to the numbers settled in each of the previous three years—read, for instance, a report of 2019-2020 statistics TaxNewsFlash.)
Tax professionals have observed that:
- One factor driving this increased transfer pricing yield could be the result of the “extra boost” from the resolution of a number of cases falling under the profit diversion compliance facility, but note that this figure is too small to explain the entire increase.
- The other aspect that stands out from the data is the £1.467 billion of additional corporation tax generated from diverted profits investigations (up by over 100% from the FY 2020 comparison). HMRC raised large numbers of diverted profits tax (DPT) charging notices for several years prior to FY 2021, and the 15-month review period provides a finite window for taxpayers to reach a settlement with HMRC on a transfer pricing basis, to prevent tax from being charged at the higher 25% rate. Tax professionals believe that these charging notices may have helped drive up the yield in FY 2021, and a few very large cases could be having a significant impact on the numbers.
- There are no signs that HMRC officials are using this “big stick” more sparingly based on the numbers of new notices issued in FY 2021 and the level of net DPT receipts from charging notices (£151 million) which were the highest they have been since FY 2018. It was also notable how swiftly the UK government responded to announce a change in legislation following the direction by the First-tier Tribunal in the Vitol Aviation case. Read TaxNewsFlash
Advanced pricing agreements (APAs) and advanced thin capitalisation agreements (ATCAs)
- HMRC agreed to 24 APAs in FY21 and received an equal number of new applications. This reflects a continuing trend of lower demand for APAs and is unlikely to change based on these statistics because the average time taken to reach an agreement was over 4.5 years.
- There were also an increased number of withdrawn applications (11 withdrawals) and applications turned down (four refused).
The reality is transfer pricing issues are becoming harder (not easier) to resolve bilaterally following the original base erosion and profit shifting (BEPS) project and resulting changes made to the OECD Transfer Pricing Guidelines that introduced new concepts that were loosely defined and open to differing interpretations. Against this backdrop of increasing uncertainty, APAs still have an important role to play in providing taxpayers with a bilateral dispute prevention mechanism and have the potential to resolve transfer pricing uncertainties far quicker than an HMRC enquiry, followed by a MAP which based on the latest statistics, could take six years from when the enquiry was opened.
Tax professionals, however, have expressed some optimism because the most recent statistics regarding bilateral APAs published by the tax authorities in the United States, Canada, and Japan all show reduced time to resolve (generally three years or less) and China reported it concluded 14 bilateral APAs in 2020 (mostly in the manufacturing sector) despite the disruption of the pandemic. HMRC officials have also been involved in OECD working groups that seek to promote the adoption of APA best practices among OECD member countries.
The number of advance thin capitalisation agreements (ATCAs) currently in force and new ATCAs accepted and agreed to continue to decline, and the average time to agree to an ATCA has continued to grow despite ATCAs generally being unilateral agreements and the lower demand for them. The publication of the new Chapter X guidance on financial transactions creates new opportunities for bilateral APAs for financial transactions, and HMRC indicated plans to discuss this area with some of the UK’s key treaty partners.
Mutual agreement procedure (MAP)
- HMRC settled 62 MAP cases in FY 2021—the lowest number since FY 2017 and less than half the number of new cases admitted.
- The average time taken to resolve the 62 cases settled in FY 2021 was 34.4 months—reflecting that the UK Competent Authority team made a concerted effort to try to resolve a number of older cases during 2020 and was successful in doing so (OECD statistics for the 2020 calendar year showed the UK’s inventory of pre-2016 transfer pricing MAP cases was almost halved in 2020 falling from 50 to 27).
- The MAP statistic is one that HMRC will be looking to improve, being mindful of the 24-month target set as part of BEPS Action 14 and being seen to lead by example in this area. The rapid growth in the MAP inventory will also be of concern.
Tax professionals expect HMRC would significantly improve these metrics in the short term as almost 50% of the UK’s transfer pricing MAP inventory at the end of 2020 related to cases involving Italy, Germany, and India.
Profit diversion compliance facility (PDCF)
- HMRC launched the profit diversion compliance facility (PDCF) in January 2019, and this is the first report reflecting data on the usage and outcome for the PDCF.
- The statistics reveal that the PDCF has been successful with 22 cases resolved in 2020-2021—an average of 12 months from registration meeting to receiving a decision from HMRC, with 96% of taxpayers having their final proposals accepted.
- Although more of the 74 PDCF registrations in 2018-2019 and 2019-2020 remained unresolved as of 31 March 2021, this statistic will reflect the additional time granted by HMRC because of the effects of the coronavirus (COVID-19) pandemic.
Tax professionals believe that the PDCF process has had the desired effect and that more cases could be resolved in later years. HMRC officials are generally taking a principled approach to cases and not requiring adjustments in every case, meaning that cases can be efficiently resolved—whether or not an adjustment is proposed.
Approximately two-thirds of the businesses that received “nudge letters” from HMRC did in fact register for the PDCF. Some businesses registered without having been prompted by a nudge letter. Some believe that HMRC would view the £305 million of revenue yield from PDCF as a “good return on investment” and thus it seems likely it would be continued.
Given the data on the duration of enquiries, multinationals with transfer pricing uncertainties—particularly in light of the introduction of the uncertain tax treatment notification rules that apply for corporation tax returns due on or after 1 April 2022—may require notifications when there are UK transfer pricing-related risk provisions in the company accounts.
The transfer pricing environment in the UK continues to evolve. Draft legislation is expected to be published over the summer regarding the new documentation requirements for large businesses and further details on the “summary audit trail” requirement, and this could provide HMRC with information on the quality and source of the inputs into the documentation.
Upfront investment by taxpayers with regard to the options for managing transfer pricing risks may pay dividends down the road—for example, a check on transfer pricing policies and a refresh of functional and value chain analyses in light of the focus areas within the PDCF guidance may prove beneficial.
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in the UK:
Phil Roper | firstname.lastname@example.org
Nicholas Stevart | email@example.com
Read a May 2022 report prepared by the KPMG member firm in the UK
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