Transfer pricing tax disputes - What are we seeing currently

In the first two articles in this series we provided an overview of HMRC’s response to Profit Diversion, focusing on the changes we are seeing in transfer pricing (TP) disputes involving HMRC. In the next two articles, we want to look in a little more detail at what we are seeing and at some approaches to resolution that have proved helpful in practice.

Since the BEPS project, HMRC is now much more prepared to set quite challenging expectations of potential additional tax yield from TP or diverted profits tax (DPT) enquiries, often well ahead of fully evaluated and developed technical positions. Further, it is often necessary for HMRC to issue protective assessments or DPT charging notices before enquiries are completed in order to ensure that it does so within the allowed time limits. Increasingly, we are seeing assessments raised in the early stages of a dispute and, in the case of a DPT charging notice, the amount charged to DPT must be paid within 30 days without possibility of postponement.

The impacts on cashflow and potential disclosure requirements for a business have had the effect of reversing the burden of proof on taxpayers (in practice rather than legally), bringing considerable pressure to bear on them to positively evidence and demonstrate their filing position. Doing so has become more challenging due to the evidence-based forensic approach now adopted by HMRC. A typical case might involve:

• Interviews - in a standard enquiry, HMRC does not have a right to interview officers or employees of the business. However, taxpayers have typically found that letting HMRC talk to the right people can be an efficient way of helping HMRC to understand their businesses, assuming suitable terms of engagement can be agreed with HMRC. Providing access to such personnel is often seen as positive by HMRC and can help make a break through by providing helpful additional evidence when discussions stall and positions become entrenched. These will typically include operational personnel as well as senior management.
• Email reviews - few significant TP enquiries are now resolved without involving a substantial review of operational emails. As well as a further source of data, HMRC often use email reviews as a means of testing and verifying statements made elsewhere, for example in interviews and TP documentation. Whilst such reviews have now been made much more efficient by technology, they can be an onerous and intrusive undertaking, unless their scope can be sensibly defined.
• Information on offshore entities - HMRC is now far more likely to be asking questions about the rest of the group to gain a greater understanding of global structures, transaction flows and value generation. As a result it is now making far more frequent and earlier requests under bilateral treaties and other international agreements or legislation to obtain material that may have historically been assumed to be out of HMRC’s reach. In light of this, many businesses have now decided to be more transparent with HMRC voluntarily, providing information that is technically outside the power or possession of the UK entities in order to speed up the resolution of a dispute. But care needs to be taken as once in HMRC’s hands this information may itself be the subject of an outbound exchange by HMRC.

In keeping with this wider, holistic view, being able to describe the global value chain, and demonstrate how this supports the TP policies becomes crucial for many businesses, especially where their intellectual property is kept offshore. This will be the topic of our next blog.

Ian Woolley and Ben Proctor are Senior Managers in PwC’s Transfer Pricing Team and Tax Disputes Team respectively. Both Ben and Ian are former HMRC tax inspectors.