Disputed U.K. Tax From Transfer Pricing Up by 60 Percent

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By Ali Qassim

The amount of disputed tax relating to the transfer pricing of the U.K.'s largest businesses has risen 60 percent in the past year, according to law firm Pinsent Masons.

Her Majesty’s Revenue and Customs, the U.K.'s tax authority, is reviewing as much as 3.8 billion pounds ($4.9 billion) of large U.K. businesses’ transfer pricing, the London-based firm said June 5.

“The value of tax HMRC believes it could be owed has risen substantially, and we are likely to see increased activity in this space going forward,” Heather Self, a U.K. tax partner at Pinsent Masons, said in a news release.

The latest figures come as HMRC aims to raise an additional 5 billion pounds a year by 2020 through tackling abusive tax arrangements, aggressive planning, and tax system imbalances.

Transfer pricing, defined as the price at which divisions of a business transact with each other, is an area of focus for tax authorities amid efforts to clamp down on multinational companies exploiting legal loopholes to avoid tax.

‘Robust’ Compliance Procedures

HMRC has been investing in transfer pricing specialists, aiming to ensure “robust” compliance procedures, Self said.

The total number of transfer pricing reviews into the U.K.'s 2,000 largest businesses fell by 10 percent for the 2016 financial year to 362, according to Pinsent Masons’ figures, obtained through a Freedom of Information request.

The drop suggests that HMRC is focusing on higher-value and large-scale disputes, the law firm added.

Yet it fall may also mean that HMRC’s transfer pricing specialists are focused on other matters, such as the the diverted profits tax, or DPT.

Pinsent Masons noted that DPT operates through two basic rules. The first rule “counteracts arrangements by which foreign companies exploit the permanent establishment rules,” and the second “prevents companies from creating tax advantages by using transactions or entities that lack economic substance.”

Introduced in April 2015, the measure imposes a 25 percent levy on any profits that multinational companies have moved from the U.K.

Diageo Plc, the London-based alcoholic beverage company behind Johnny Walker and Smirnoff, said May 10 it will pay 107 million pounds after it learned that HMRC intended to issue the company an official notice under the DPT.

Two months earlier, London Stock Exchange Group Plc, Europe’s second-largest stock exchange by market capitalization, said in its full-year results it has made an accounting provision of 4.5 million pounds due to “uncertain tax positions” that included the tax.

Transfer Pricing Review Results

The amount of tax typically due following the transfer pricing reviews tends to be around half the initial estimates, Pinsent Masons added in the press release, citing estimated figures from HMRC’s specialist Large Business Directorate.

Diageo, the world’s biggest distiller, said in its May 10 statement that it “does not believe” it falls in scope of the DPT. To challenge HMRC’s assessment, the company will have to pay the assessed total and then work with the tax authority to resolve the issue.

HMRC told Bloomberg BNA it is clear that corporations, “like any other taxpayers, must pay the tax that is due and we do not want to settle for less.”

In a June 2 email, HMRC said it operates a “resource to risk” compliance program, which means the tax authority allocates resources to conduct reviews based on the level of risk presented in the arrangements used by businesses.

“The transfer pricing Governance procedures ensure that HMRC allocates resources to challenge those issues that present a substantial risk of tax loss to the UK,” HMRC said.

With assistance from Ben Stupples.

To contact the reporter on this story: Ali Qassim in London at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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