Following concerns in recent years about whether large multi nations are paying enough tax, transfer pricing (TP) has become an increasingly important tool for HMRC.
Definitions
Transfer pricing (TP) requires groups of companies to use market value terms for group transactions to prevent profits being transferred to low tax jurisdictions.
Closely related is Diverted Profits Tax (DPT) which taxes profits diverted out of the UK.
Key points
- £1.7bn raised from TP adjustments, more than three times the amount raised five years ago
- HMRC also raised £388m from DPT
- The number of TP investigations dropped to 250 during the year, from 362 the previous year
- Average TP enquiry now lasts more than 2.5 years
- Fewer taxpayers approaching HMRC to discuss/agree TP arrangements in advance
- More tax payers are applying for Mutual Agreement procedures with a view to avoiding double taxation from TP adjustments
Our view
The Diverted Profits Tax and the tightening of TP rules mean many more tax payers are now more cautious in their tax planning, and leave more profits taxable in the UK.
HMRC still see these as important areas and are now targeting fewer but larger enquiries on TP.
It must remain a key concern for tax payers operating internationally, and importance will increase over time.
