HMRC has today announced the introduction of a Facility aimed at Multinational Enterprises (‘MNEs’) with a risk of HMRC challenge in relation to what is described as "profit diversion". The new Facility is designed to encourage companies potentially impacted to review both the design and implementation of their tax policies, change them as appropriate and use the Facility to put forward a report with proposals to pay any additional tax, interest or penalties due.
Profit diversion can be best understood as multinationals using arrangements targeted by Diverted Profits Tax (DPT) but will usually be tackled by HMRC by way of Transfer Pricing (TP), although other secondary challenges may be be made, such as Permanent Establishments, DPT, Corporate residence, royalty Withholding Taxes, anti-hybrids and Controlled Foreign Companies. Profit diversion is considered a substantial risk to the taxation of MNEs by HMRC and therefore new multidisciplinary teams have been created to strengthen HMRC’s response. HMRC’s evidence-based forensic approach was discussed in our previous blog entry.
HMRC’s view is that some multinational businesses have adopted cross-border group arrangements which are not consistent with the OECD Transfer Pricing Guidelines, and that some have not implemented arrangements as originally intended or as reported to HMRC, resulting in the diversion of UK profits to an overseas entity where the profits are taxed at lower rates or not at all. Within the Facility guidance HMRC highlight a number of issues they have identified through their recent investigations and that they are seeking to address.
The guidance provides details of some risk indicators HMRC will be applying to help identify potential profit diversion, which we will cover in more detail in our next article. Through a number of information sources (CbCR, annual reports, websites, etc), HMRC has conducted extensive data profiling, research and intelligence to identify MNEs that they believe bear the hallmarks of profit diversion. Such MNEs and those who failed to notify for DPT in 2015 can expect to be subjected to rigorous testing and challenge by HMRC.