23 01 2019

Launches Profit Diversion Compliance Facility For MNEs

HM Revenue and Customs (HMRC) has announced plans and guidance for a new Profit Diversion Compliance Facility, which is intended to support multinational companies (MNEs) concerned about their transfer pricing arrangements to resolve any issues with the tax agency.

HMRC said it has found in its investigations that some MNEs have adopted cross-border pricing arrangements that are based on an incorrect fact pattern and/or are not consistent with the OECD's Transfer Pricing Guidelines (TPG), as clarified through Actions Points 8-10 of the OECD Base Erosion and Profit Shifting Project.

According to HMRC, this is for two main reasons:

"Firstly, some have made incorrect assumptions, or not implemented arrangements as originally intended or declared to HMRC, so that there is a divergence between the fact pattern on which the Transfer Pricing (TP) analysis is based, and what is actually happening on the ground. This could be for a variety of reasons, including:

insufficient understanding or incorrect/misleading statements on the nature or relative value of functions, assets, and risks at the outset;
businesses change over time so that the functional profile may become different from that originally assumed or intended;
some businesses undervalue the contributions made by staff in the UK and overvalue the contributions of staff in other tax jurisdictions."
"Secondly, the TP policies are not in accordance with the OECD TPG, for example because of:

over reliance on TP policies predicated on contractual assumption of risk and legal ownership of assets, giving insufficient weight to the location of the control functions and/or the contributions to those control functions in relation to the risk and/or the important functions in relation to the assets;
too heavy a reliance on inappropriate comparables."
Explaining the policy intent in launching the Facility, HMRC said it "prefers MNEs to fully disclose significant tax uncertainties or inaccuracies and to ensure compliance with tax law, and [it] will work co-operatively, proactively and transparently with MNEs to resolve any tax uncertainties and risks."

It said: "The new facility is designed to encourage the MNEs with arrangements that might fall within [the Diverted Profit Tax's] scope to review both the design and implementation of their TP 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 due."

The extensive guidance sets out the scope of the Facility, the rules, and how to make a submission.

According to HMRC, the Facility will enable MNEs to: avoid an investigation by HMRC if a full and accurate disclosure is made; achieve greater tax certainty; access an accelerated process wherein HMRC will respond to a proposal within three months of a submission; manage their own internal processes around what evidence to gather, who is interviewed, what comparables are used (if any), and how the analysis is presented; and access unprompted penalty treatment, if HMRC has not already started an investigation into profit diversion.

A key deadline for obtaining reduced penalties is December 31, 2019, as explained in the guidance.