The taxman is concerned that some multi-national enterprises have cross-border arrangements in place which are not consistent with the OECD transfer pricing guidelines, that result in the diversion of profits away from the UK such that profits are taxed at lower rates or not at all.
These types of arrangements are targeted by the diverted profits tax (DPT) legislation, effective from 1 April 2015, which specifically addresses situations where:
- UK entities use other entities or transactions in their supply chain that lack economic substance to exploit tax mismatches; and
- a person carries out activity in the UK in connection with supplies by a foreign company which is designed to ensure the foreign company is not trading in the UK through a taxable permanent establishment, and which is designed to secure a tax advantage or tax mismatch.
The disclosure facility aims to encourage companies to review both the design and implementation of their operational structures and transfer pricing policies, change their transfer pricing policies where appropriate and use the facility to put forward a detailed tax report. This report would cover information in connection with a number of tax sensitive aspects impacting their UK tax position, with proposals to pay any additional tax, interest or penalties resulting from any necessary adjustments.
Once a company (on its own account or on behalf of all UK entities involved in the arrangements) has registered under the facility, it has up to six months to prepare and submit its report.
Once the facts have been established, the report should contain a detailed transfer pricing technical analysis to delineate the relevant controlled transactions and compare the pricing and conditions of those controlled transactions with suitable comparable transactions with independent enterprises. HMRC anticipates that in the majority of cases where an acceptable transfer pricing resolution can be reached, this is likely to eliminate any potential DPT charge.
If a company registers under the facility, HMRC will not start an investigation into potential underdeclared corporation tax or DPT liabilities arising from arrangements during the periods that have been registered under the facility. Furthermore, once a company registers under the facility, makes full disclosure and pays any additional tax, interest and penalties arising, HMRC will treat the disclosure as ‘unprompted’ for penalty purposes.
HMRC will have certain targets in their sights who they believe are falling foul of the rules and it is anticipated that these businesses will shortly be receiving letters to encourage them to use the facility, so this is not a mere fishing trip. The message from HMRC is act now or risk being assessed and paying potentially higher penalties.