Hundreds of multinationals will now have received a letter from HMRC, suggesting that they register for the new Profit Diversion Compliance Facility. Those who don’t register are more likely to receive formal enquiries from HMRC.
Those who receive the letter are groups that HMRC consider may have used incorrect transfer pricing in areas targeted by Diverted Profits Tax. HMRC say that they have a growing list of multinationals who could be diverting profits, and who they plan to investigate.
Although this tax was described as “the Google tax”, I know from my work leading KPMG’s response to Diverted Profits Tax back in 2015 that it has potential applications to a much wider group of companies than just technology companies. There are issues for retail groups selling high-tech products to industry and to individuals, fashion groups, investment funds, captive insurers etc. (The facility does not apply to groups where non-UK resident companies deal in or develop UK land).
The disclosure process
The opportunity to register is open until 31st December 2019 and registering immediately in response to a letter may not be a good idea. A group which registers will discover that it has 6 months to produce a report in the specified format, which includes calculations of tax, interest and penalties. The taxpayer is required to pay the tax due when they submit the report, while HMRC aim to respond to the report within 3 months. The breadth and depth of the required report makes 6 months to prepare it an extremely challenging target.
Before the Requirement to Correct deadline, we saw trusts and individuals making protective registrations where they were unsure of their technical or factual position, using the time before the disclosure report was due to finalise their analysis. But the amount of work which is required to make a disclosure under this new Facility is so extensive with such a tight time limit that this seems to be inadvisable here.
Which accounting periods would a disclosure under the Facility cover?
Diverted Profits Tax is an unusual tax, because amending your corporation tax computation to transfer pricing agreed by HMRC generally means that no Diverted Profits Tax is payable. This is referred to in the HMRC guidance. Since the DPT rate is higher than the corporation tax rate by 6%, most groups opt to amend the corporation tax return. However, this means that the group may end up having to amend returns or make voluntary disclosures for periods before the introduction of Diverted Profits Tax in 2015, because if they have used the same Transfer Pricing policy in earlier years’ computations, then these too may be regarded by HMRC as incorrect.
Because of the various assessing time limits, a group needs to establish how HMRC will characterise its behaviour before it can decide which accounting periods the report needs to cover- HMRC can assess earlier periods if the behaviour is “careless”, as that term is interpreted. The guidance specifically says that taking transfer pricing advice is not, of itself, sufficient to demonstrate that reasonable care has been taken.
Investigating your own transfer pricing
The most significant benefit of registering for the Facility is that any penalties should be calculated on the basis that the group has made an unprompted voluntary disclosure, i.e. at a lower level than would have been charged on penalties arising as a result of an HMRC investigation.
There is also a benefit in that HMRC will not launch an investigation. However, this in effect means that the group is required to investigate itself, to the same depth as HMRC would have investigated it. The Facility sets out the extensive scope of the report which is to be prepared, and the extent of the factual research which is required to support it; the scale of work required should not be under-estimated.
HMRC set out some of the areas where they have found groups’ transfer pricing policies and implementation to be inadequate. These include the following;
- Transfer pricing that is out of date in relation to the group’s current business and functions. (This can occur in particular where a transfer pricing analysis relied on UK individuals working in another country, and they drift back to working in the UK).
- Transfer pricing that is “old-fashioned” in relying on contractual allocation of risk to low-tax jurisdictions, rather than looking at significant people functions.
- Transfer pricing analysis that is built on an incorrect factual foundation.
The guidance says that the action required includes interviewing staff and checking contemporaneous emails, not just producing the transfer pricing documentation.
The scale of the report which is required
In order to submit the required report, a group will need to;
- Establish the accounting periods which it must cover
- Undertake a review of facts and evidence
- Provide the detailed transfer pricing analysis and quantify the tax adjustments
- Include a detailed section of the other international tax matters HMRC require, including company residence in the UK, permanent establishments in the UK, deduction of withholding tax, treatment of CFCs, and indirect tax, which will withstand HMRC scrutiny.
- Quantify any tax adjustments arising from this, again establishing which accounting periods HMRC can assess
- Determine how HMRC will characterise the group’s behaviour for penalty purposes and calculate any penalties due, including failure to notify re Diverted Profits Tax
All these workstreams will have to be project managed carefully to produce the report within 6 months of registering.
Risks not covered by registering under the Facility
HMRC list certain actions which they may still take against a group which registers for the Facility but does not make a full and accurate disclosure, i.e. where HMRC consider that the disclosure report is inadequate or inaccurate. This includes launching a CoP 9 enquiry or making criminal charges.
The quality of the disclosure is important in protecting the Senior Accounting Officer given that the group may admit careless behaviour: HMRC say that the business is required to make a full and accurate disclosure and co-operate fully.
Use of advisors
Groups who use a team from their auditor for their transfer pricing advice may find that the audit firm cannot represent them in relation to the disclosure because of independence requirements.
Apart from the transfer pricing and Diverted Profits Tax analysis, a group would also require an advisor who brings the expertise to advise on:
- The scope of the transfer pricing investigation necessary to prepare the report
- The scope of the investigation into the other international tax issues necessary to prepare the report
- The characterisation of the group’s behaviour for assessment and penalty purposes
- The risks in relation to fraud and the position of the Senior Accounting Officer
- Negotiation with HMRC
Once a group has registered, HMRC say that they are willing to meet with them to discuss in advance their plans for the review and report. Would you want to walk into such a meeting without an experienced investigations specialist by your side? Trident Tax would be happy to help.
Article written by Christine Hood of Trident Tax