Revenue & Customs has ramped up its investigations into multinationals’ cross-border deals, pushing up their potential exposure by 60 per cent to nearly £4bn.
Sign up By signing up you confirm that you have read and agree to the terms and conditions, cookie policy and privacy policy. The crackdown is a sign of the heightened scrutiny of multinationals’ tax affairs in response to a public backlash against tax avoidance. It is also likely to reflect new legislation — the so-called “Google tax” — introduced to stop companies diverting profits overseas.
Heather Self, a partner at Pinsent Masons, said a significant number of new enquiries appeared to have been opened. “It seems the Revenue is taking a fresh look at the UK’s largest businesses, with a focus on intra-group, cross-border transactions.”
Transfer pricing investigations — scrutinising the prices charged on transactions between different parts of the same company — was the largest source of risk in big companies’ tax affairs in March 2016.
The “tax under consideration” — an estimate of the maximum potential liability before full investigations have been completed — relating to transfer pricing rose from £2.4bn in March 2015 to £3.8bn a year later. Only a portion of it is likely to be ultimately collected as investigations often conclude that less tax is owed.
Ms Self said the rise might be an early sign of the impact of the diverted profits tax (DPT), which was first introduced in April 2015 to crack down on contrived avoidance. Although it was too soon to see the DPT reflected in the figures, HMRC may have stepped up its transfer pricing challenges for earlier years with a view to extending them to the DPT later on, she said.
Jim Harra, a top HMRC official, told MPs in October that it had identified 100 big companies that were at high risk of being caught by the DPT, with another 70 likely to face an in-depth assessment. HMRC expects the DPT to raise an extra £1.35bn by 2021 but the revenues will largely be collected as corporation tax because the DPT will provide an incentive for them to restructure.
Related article Tax avoidance clampdown aims to raise extra £2bn by 2022 Measures include targeting incorporated operations and changing small business schemes Ms Self said the figures also reflected HMRC’s investment in transfer pricing specialists. Its transfer pricing team was increased by a quarter after it was given an extra £29m in 2012 to challenge abusive transfer pricing arrangements, after MPs attacked the tax affairs of companies such as Google, Amazon and Starbucks.
Overall, the tax under consideration rose by 15 per cent from £19bn to £21.8bn in the year to March for HMRC’s large business directorate, which scrutinises the tax affairs of the UK’s 2,000 largest and most complex businesses. There was also a big rise in VAT investigations.
The figures — released in response to a freedom of information request from HMRC -are just a snapshot of work in progress and fluctuate as cases are settled and new ones taken up. The latest figures would have been reduced by Google’s £130m settlement in February that partly related to transfer pricing matters.
A recent survey by EY, professional services group, reported significantly more transfer pricing disputes, across a broader range of issues in more jurisdictions than in the past. By far, the largest anticipated increases in controversy over transfer pricing centred on intellectual property and arguments over whether companies had “permanent establishments” or taxable presence in a country.
Changes to transfer pricing rules have been recommended by the Paris-based Organisation for Economic Co-operation and Development which concluded that governments were losing between 4-10 per cent — between $100bn-$240bn — of corporate tax revenues every year.
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