According to Pinsent Masons, HMRC’s Large Business Service* is investigating £1bn of tax linked to transfer pricing issues, 47% up from last year's figure of £680m.
Pinsent Masons says that HMRC’s increased compliance activity is showing up in more enquiries into transfer pricing issues.
Transfer pricing concerns the charges made between the different parts of an international business for goods, services, or intangible assets such as Intellectual Property, which can affect the profits reported in different markets. Recently, multinational companies including Amazon, Starbucks, and Google have been accused of deliberately transferring profits from the UK to lower tax jurisdictions to reduce their UK tax liability.
Heather Self, Partner** at Pinsent Masons, comments: “There has been a lot of public discussion around companies’ UK tax bills, and these figures show that HMRC has been taking an increased interest in where multinationals with UK operations pay their taxes.”
“With increased pressure from the government to bring in more revenue, and more resources to investigate potential avoidance and evasion, HMRC has been investigating more and more tax payments. This doesn’t necessarily mean there is more avoidance or evasion taking place, but that HMRC is being more thorough with its investigations.”
Heather Self adds: “HMRC will investigate a company where it thinks it has crossed a line on transfer pricing, and HMRC will demand extra taxes from companies that do have a genuine case to answer.”
Pinsent Masons adds that calls for law changes to prevent ‘abusive’ transfer pricing by multinationals, or for taxes on revenues rather than profits, are a knee-jerk reaction – and that changes could be prevented by international law.
Explains Heather Self: “The UK has to accept that it cannot change the law on transfer pricing or the taxation of revenues unilaterally. There is already a tax on turnover in the UK and it’s called VAT. EU law does not allow the UK to create new turnover taxes.”
“Rules on transfer pricing are set by the Organisation for Economic Co-operation and Development (OECD), and while they could do with some reform, that process is actually already under way.”
Heather Self adds: “If the Government followed through on the calls by MPs and campaigners to change unilaterally tax laws governing multinationals, the UK’s reputation as a stable place to do business would be put at risk.”
Pinsent Masons adds that the contraction of the commercial lending market will also have boosted HMRC’s transfer pricing investigations.
Pinsent Masons explains that loans between companies in the same group can attract tax relief, but only if the company can show that the loan would have been available commercially.
Heather Self says: “It is often cheaper for multinational businesses to borrow on a group basis and make inter-company loans to trading subsidiaries. Tax relief will have been claimed on these loans, but HMRC will have suspicions that similar financing would not have been available on the open market, given the current lending drought.”
*HMRC’s Large Business Service is responsible for the taxes paid by the 770 largest businesses in the UK. “Tax under consideration” may include both potentially underpaid tax and the risk to the Exchequer from companies litigating over amounts of tax they have overpaid. Data as of July 2012.