Diverted Profits Tax Update

It’s been missing for three years, but HMRC have restarted publishing statistics on transfer pricing enquiries and adjustments and this year have added statistics on the diverted profits tax (DPT)…

The headline is a 90% increase in transfer pricing adjustments over the prior year to £1.6 billion. Given the very high level of ongoing enquiries, and the introduction of country-by-country (CbC) reports, this is not likely to be a one-off situation.

Implications of DPT

The HMRC statistics reflect a large increase in the number of transfer pricing enquiries, often conducted in conjunction with a DPT enquiry and frequently covering more than one year. The introduction of DPT has given HMRC another tool to use in transfer pricing disputes, as well as being a separate taxing opportunity in its own right.

A transfer pricing enquiry is normally expensive for the company involved, not least because of the time spent; the length of enquiries is now just short of 29 months to reach a point of settlement. This reflects the increasing complexity of cases (including DPT implications) and increased levels of governance within HMRC. It is possible, however, that this figure may drop in 2017/18, as HMRC examiners have been accelerating enquiries this year in order to work within the window for notices in respect of the first year of DPT.

APAs, MAPs, ATCAs

The statistics also include details on advance pricing agreements (APAs), mutual agreement procedures (MAPs) and advance thin capitalisation agreements (ATCAs).

There has been a decrease in both the number of APA applications and APAs agreed in the year, as well as an increase in the number of applications rejected. The statistics show a similar timeframe for reaching agreement to the prior year, which was a large increase on 2014/15 and reflects the complexities of DPT and increased governance.  

While it is assumed that APAs will continue to be a useful tool for taxpayers, the issue of a revised Statement of Practice last year means that it really only applies to taxpayers of a greater size and complexity. Similarly, ATCAs have seen a reduction in the number of applications, along with an increase in the time to resolve.

There is concern at the drop in the number of MAP cases resolved, alongside an increase in the claims made and the length of time to resolve them. This is likely to get worse, as tax authorities take different views on the recent revisions to the OECD Transfer Pricing Guidelines and gain access to greater levels of data through CbC reporting.

If you would like more details on the above, please contact:

Melissa Christopher
Partner
+44 (0)20 7430 5894
mchristopher@fitzandlaw.com

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