HMRC introduces a new Profit Diversion Compliance Facility

14 January 2019

HMRC appears to have concluded that significant numbers of businesses have yet to align their transfer pricing policies with the transfer pricing outcomes of the OECD/G20 BEPS Project. HMRC has accordingly introduced a new Profit Diversion Compliance Facility (PDCF) to encourage multinational enterprises (MNEs) to make voluntary disclosures about any transfer pricing arrangements that fall within the scope of the Diverted Profits Tax (DPT) legislation.

MNEs are encouraged to review their transfer pricing policies, change them if appropriate, and submit a report with a proposal to settle any tax, interest and penalties due. Reports made by MNEs that are not already subject to an investigation by HMRC will be treated as unprompted disclosures, and will thereby attract lower minimum penalties. In certain circumstances penalties will be reduced to nil as long as accurate disclosure is made by 31 December 2019. HMRC also states that tax-related criminal investigations will be highly unlikely if a full and accurate disclosure is made.

HMRC has stated that it will contact businesses it has identified, through its ongoing data analysis, as having a combination of features associated with profit diversion. Using the PDCF may be beneficial if you are contacted by HMRC, or if you feel you may be at risk of a DPT investigation.

Is this relevant to you?

The PDCF guidance provides useful insight into HMRC’s views on what situations give rise to profit diversion risk, how a transfer analysis should be carried out, and what evidence is required to support intragroup transfer pricing policies.

HMRC’s indicators of Profit Diversion Risk include situations where:

  • risks are contractually allocated to non-UK entities which cannot in fact exercise meaningful control over such risks;
  • no or insufficient profits are allocated to UK entities carrying out high-value functions; or
  • no or insufficient profits are allocated to UK entities which perform important functions, control economically significant risks, or contribute assets, in relation to valuable intangibles legally owned by non-UK entities.

How JHA can help

Given HMRC’s approach, you may wish to seek a second, independent view on whether your current transfer pricing filing position is robust. If you do, we can offer unique expertise in assessing whether you may be at risk of a transfer pricing related tax charge and, if so, how best to present your case to HMRC under the PDCF.

JHA’s tax disputes team has vast experience of dealing with HMRC enquiries and investigations in transfer pricing disputes, having advised on some of the highest profile and value disputes in recent years. Uniquely, we are top ranked in both Chambers & Partners and Legal 500 for tax disputes generally. We bring together in one firm specialist tax QCs, experienced tax disputes solicitors, and forensic accountants. We are independent of, but have good relations with, the Big 4 and other leading accounting firms. We consider that we are exceptionally well placed to help guide you through any report you wish to make under the PDCF, whether with your internal team or working in conjunction with your other tax advisors.

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