HMRC’s 2017/18 transfer pricing and DPT statistics show its extra effort is paying off

Yields from transfer pricing enquiries have continued to grow exponentially since a low point in 2014/15, with the 2017/18 yield of £1,682m being over twice that of 2014/15, and three times that of 2012/13. It is also taking longer than at any time (since records were first kept in 2012/13) to settle TP enquiries, despite the fact that HMRC has it highest ever workforce (365 staff) to deal with international tax risks.

Advance pricing agreement (APA) applications have significantly reduced, and the number of applications turned down has proportionately increased. The process for agreeing APAs is now taking longer than ever, often double the time taken in 2012/13. Similarly, the time taken to agree advance thin capitalisation agreements (ATCAs) in 2017/18 is significantly higher than in any previous year.

On the other hand, mutual agreement procedure (MAP) cases both resolved and admitted during 2017/18, have increased considerably on prior years (2½ times what they were in 2012/13), but again they are taking much longer to resolve.

The DPT yield has increased from £13m in 2015/16 to £388m in 2017/18 with more than half (£219m) of that figure arising from HMRC-issued charging notices. The number of DPT notifications received by HMRC have also increased from 48 in 2015/16 to 220 in 2017/18.

Unsurprisingly, HMRC highlighted its intention to use new country by country reporting data to further support its risk assessment processes.

Practical considerations

Transfer pricing and DPT are receiving much increased, and more focused attention from HMRC. HMRC’s ‘resource to risk’ compliance policy and ‘principles-based’ approach to TP governance more generally, are resulting in much more time and resource being spent underpinning HMRC positions (and, some may argue, HMRC employing much less flexibility in pragmatically agreeing enquiry outcomes).

At the same time, everything is also taking longer to agree with taxpayers. While this may not particularly worry HMRC (as long as tax yields keep rising), it will continue to create significant compliance risks for multinational groups seeking certainty in relation to their transfer pricing and DPT positions.

This highlights the need for multinational groups to ensure that effective processes are in place to assess and manage the risks associated with their international related party dealings. Groups must be careful to ensure they have taken the appropriate steps to ensure any potential enquiries can be resolved in an efficient and effective manner. This will involve adopting a pre-emptive approach to TP and DPT compliance and risk management.

The significant increase in DPT yield, and the number of notifications made, seems to indicate that businesses are either belatedly waking up to the fact that they have a DPT exposure, or they are becoming less confident about positions previously taken. This likewise highlights the need for groups to take a proactive approach to ensuring DPT compliance.

The reduction in applications for APAs is worrying: it might suggest a lack of trust in the process (or its outcomes) by multinational companies, or simply frustration over the time taken to agree, and the increased likelihood of being turned down. However, the reduction in ATCA applications is more likely to stem from the introduction of the corporate interest restriction.

The increase in the number of MAP cases, and the increased time taken to reach agreement between competent authorities, may be a sign that the ever present complexity of transfer pricing disputes is increasingly impacting the ability for tax authorities to agree on mutually acceptable outcomes.

All in all, we are living in a far more complex, and risky, world for transfer pricing compliance than ever before.

Anton Hume, transfer pricing & international tax partner, BDO (anton.hume@bdo.co.uk)