Diverted profits tax has been a 'game changer' in transfer pricing, says HMRC official

Out-Law News | 09 Nov 2017 | 10:05 am | 4 min. read

Diverted profits tax (DPT)  has been described as "a game changer in transfer pricing " by Jim Harra, director general of customer strategy and tax design at the UK's HM Revenue & Customs (HMRC) in evidence to the Public Accounts Committee (PAC) this week.

Harra acknowledged that large businesses were "feeling [HMRC's] presence in investigating diverted profits tax much more widely than they had expected".

"We are casting the net where we think there are potential liabilities, so it is all risk-based from our point of view. I think it’s fair to say that the large business sector are unhappy about the level of attention they are receiving through diverted profits tax and find that it creates uncertainty for them. But I would expect that, over time, as we work through the initial notifications and everyone has become much clearer about how it works, that would settle down from their point of view," he said.

Ian Hyde, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com said: "Our experience is that HMRC are using DPT much more widely than the 'handful of cases' they originally indicated would be within its scope. They are challenging structures which, in many cases, were implemented well before DPT was even a twinkle in a chancellor's eye. The tax at stake is often significant and, because it has to be paid up front, we think companies will have to be prepared for the possibility of litigation to get their money back."

DPT was introduced in 2015 to counter the use of "aggressive tax planning techniques used by multinational enterprises to divert profits from the UK", according to HMRC's own guidance on the tax.

Figures published in September show that the yield for DPT in 2016/2017 was £281 million. £138m of this arose from the issue of DPT charging notices and the remainder was as a result of transfer pricing adjustments.

Commenting on the impact of DPT for groups without a UK branch, Jim Harra said: "It also gives us a further reach into companies that have avoided setting up a branch in the UK. They will say that they operate outside the UK and do not have a taxable presence here. In the past they would have used that as an excuse not to give us information that we asked for. They would say, 'we’ve got no UK presence. You don’t need to know'. But the diverted profits tax has the concept in it of what we call an 'avoided permanent establishment'. In other words, if they have avoided setting up a branch in the UK in order to avoid our tax, that gives us extra reach into those extraterritorial companies. So I think it is pretty much a game changer in transfer pricing in particular."

On changes in the behaviour of groups as a result of DPT, Harra said "We have found that it has caused companies to look again at their transfer pricing structures. Many of them stay away from the edges because they know that there is an extra penalty if they go near that."

In response to a question about whether DPT is wide enough, he said:  "We are always open to reviewing it ".

"The measure itself has been copied by the Australians and we worked together with them to learn from the experience, but it is still, in international terms, a groundbreaking measure. These are early days, but it is definitely having an effect," Harra said.

On country by country reporting Harra said he had initially been sceptical as to whether country by country reporting would give HMRC much more information than they previously had. He said "I have probably changed my view about that. I think now it will give us useful information that we would otherwise not have been able to get at all, and I would expect it to change companies’ behaviour, as they are aware that the tax authorities are getting and sharing this information."

The HMRC representatives were also questioned by MPs about the 'Paradise Papers' leaked documents. HMRC chief executive and permanent secretary Jon Thompson confirmed that HMRC does not have access to the material that has been provided by the International Consortium of Investigative Journalists (ICIJ) to the BBC and The Guardian. He confirmed that HMRC has asked for access but has not yet received a reply.

He confirmed that HMRC had obtained the 'Panama papers' leaked documents, details of which were published in April 2016, However, they had had to make a payment for the information and had not obtained the information from ICIJ.

Jon Thompson revealed that in relation to the Panama Papers there are currently 66 criminal or civil investigations, four people have been arrested and a further six have been interviewed under caution. HMRC's expects an additional tax yield of £100 million from the Panama papers, he said. 

Thompson said: "We have known for some months now that there was likely to be a leak of data. We have engaged with other tax authorities to share intelligence about that, and we are part of a joint intelligence network that enables us to do that on avoidance cases. Obviously, at that stage it was about learning what everyone potentially knew about the leak. We are potentially entering a new phase now: as we get data, we can collaborate with other agencies, both in the UK and overseas, on how to interrogate the data and mine it to find out what we need to know."

"Panama, for example, was a vast amount of unstructured and fragmentary data. In paper terms, it was like someone driving 10 trucks into your car park and saying, 'in there somewhere might be some evidence of wrongdoing.' Through Panama, we gained a lot of experience of bringing to bear every agency’s expertise in mining the data and finding the nuggets, which might be tax-related, or might relate to some other wrongdoing that one of the other agencies is interested in," Thompson said.