HMRC’s Profit Diversion Compliance Facility

HMRC’s Profit Diversion Compliance Facility

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We previously issued a Newsletter on the facility, here. We have now teamed up with a specialist transfer pricing firm, Questro International AG, to offer an independent and unique service delivering the technical and investigative expertise required to address the issues presented by the PDCF. We’re offering a phased review to provide groups with the information they need to make key decisions. This article sets out the issues for groups and the ways in which Trident and Questro can provide support.

WHO DOES THIS AFFECT?

In January 2019 HMRC introduced the Profit Diversion Compliance Facility (“PDCF”). The PDCF is aimed at Multinational Enterprises (“MNEs”) using, or having used, transfer pricing arrangements which reduce UK taxable profits by under-rewarding UK activity and over- rewarding non-UK activity, where the non-UK profits are taxed at lower rates (or not taxed at all).

In their guidance for the PDCF, HMRC state they are concerned, by any divergence between the fact pattern on which TP policies are based and the reality of what is actually happening in the business. TP policies that are inherently acceptable to HMRC can create tax risks if not properly implemented. This will require groups to consider what assurance testing can be done to demonstrate internally, and to HMRC if required, that implementation of TP arrangements is robust and reflects the reality of business operations. HMRC also state they are concerned whether TP policies are in accordance with OECD requirements. For example, HMRC are believed to be targeting, amongst others, technology and eCommerce groups and other groups which generate significant profits from intellectual property held outside the UK.

Some typical transfer pricing models which HMRC regard as not in accordance with OECD requirements (where the substance does not support the profit allocation) are:

• Sales and marketing; Offshore principal with UK sales entity acting as agent or low risk distributor, contracts allocate a high proportion of risk and reward to the offshore principal
• Research and development; Offshore company owns IP, pays UK R&D company on a cost-plus basis, rewards of innovation go to the offshore company
• Intellectual property ownership; Offshore company is a passive owner of IP, UK operating company pays high royalties, directly or indirectly to the offshore company

BENEFITS OF USING THE FACILITY:
The new facility is designed to encourage MNEs with arrangements that fall within its scope to review both the design and implementation of their transfer pricing policies, change them if appropriate, and use the facility to put forward a report with proposals to pay any additional tax, interest and where applicable, penalties
• Enables UK companies to bring their tax affairs up to date in an open manner
• HMRC will not start an investigation where a UK company has registered for the facility
• The disclosure is treated as voluntary and will therefore attract lower penalties
• HMRC will not publish details of corporate entities where a deliberate inaccuracy has been disclosed
• Accelerated process for resolution (HMRC aim to respond within 3 months)

WHAT ACTION SHOULD YOU TAKE?
If you have concerns relating to your transfer pricing model and the diverted profits tax regime then you need to address the following questions in order to assess whether or not the PDCF is for you

: • What are the relevant transfer pricing and operational arrangements to be reviewed? • Does our group fall within any of the arrangements or use any of the arguments that HMRC reject?
• If HMRC investigated, would our transfer pricing policies reflect the group’s current practices? • What is the potential tax at stake and the potential exposure to penalties?
• If HMRC may investigate, would we prefer to control the timing and use of our resources by registering for the PDCF?

HOW WE CAN SUPPORT YOU
Questro International and Trident Tax are staffed by experienced professionals who were formerly in senior roles in the Big 4. Questro International are transfer pricing specialists and Trident Tax are tax investigations and disclosure specialists, with backgrounds at HMRC. This combination of skill sets, together with the ability to work quickly and flexibly, produces a unique service designed to deliver the technical and investigative expertise required to address the issues presented by PDCF. Furthermore, we are outside your existing advisor network and separate from your statutory auditor, i.e. providing a totally independent view of the potential risks associated with your transfer pricing model and whether the PDCF offers an appropriate solution for bringing your compliance affairs up to date.

Our approach is to deal with PDCF in three distinct phases:

1. IDENTIFICATION Identifying the areas for review, based on an independent review  of the group that would be taken by HMRC. This will involve reviewing existing policies and structures and identifying any that are likely to be seen as high risk, from either a legislative or implementation perspective.

2. ASSESSMENT This will require a more in depth review of policies and procedures and risk-based testing of their implementation. This will include a review and analysis of data remotely on a technical and investigative basis, as well as onsite and remote interviews with key stakeholders in the organisation.

3. DOCUMENTATION Preparation and submission of a disclosure report in accordance with HMRC requirements. If we conclude that no disclosure is required, the report will serve as a document that can be used as required to demonstrate to HMRC and/or internal stakeholders that the group has a defensible transfer pricing model and prevent or minimise future equiry risks.

We offer a tailored, collaborative service that enables you to assess your position without committing to a group-wide review. This allows review work to be progressed incrementally, derived on risk-based assessment.

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