Transfer Pricing and Diverted Profits Tax statistics 2022 to 2023 (2024)

The transfer pricing rules and the Diverted Profits Tax (DPT) are important elements in a range of measures to make sure multinationals pay the right amount of tax on the share of their profits arising from their economic activities in the UK.

Transfer pricing

The UK’s transfer pricing rules set out how transactions between connected parties are priced for tax purposes. This includes transactions between companies in the same group. The rules ensure that the UK can tax its share of profits in accordance with the internationally recognised transfer pricing principle (known as the arm’s length principle).

HM Revenue and Customs (HMRC) challenges arrangements that do not allocate the right amount of profits (the arm’s length amount) to the UK.

Transfer pricing yield

The transfer pricing yield figures include additional tax revenue from enquiries (including real time interventions), Advance Pricing Agreements (APAs), Advance Thin Capitalisation Agreements (ATCAs) and transfer pricing Mutual Agreement Procedure (MAP) cases.

Transfer pricing yield from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Enquiries (including real-time interventions)

Number of enquiry cases (including real-time interventions) settled from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Average age of settled enquiries from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Staff working on international tax issues

In 2022 to 2023 there were 397 (398 in 2021 to 2022) full-time equivalent staff working on international tax issues involving Multinational Enterprises (MNEs) including transfer pricing, DPT, Controlled Foreign Companies (CFCs), and cross border debt.

This figure includes time spent on international tax issues by dedicated international tax specialists, Corporation Tax (CT) specialists, and policy and technical advisers.

These staff work with other expert industry and tax specialists to tackle issues that represent a substantial risk of tax loss to the Exchequer in line with HMRC’s ‘resource to risk’ compliance policy.

Advance Pricing Agreements

An APA is a written agreement between a business and HMRC which determines the appropriate transfer pricing method to be applied to certain transactions for a set period of time. APAs are recognised as international best practice by the OECD in managing compliance with transfer pricing rules.

They help tax authorities, including HMRC, to establish early on how transfer pricing rules apply to complex cross-border transactions. They provide multinational businesses with greater certainty about their tax liabilities so that they pay the right amount of tax at the right time and help to ensure that a business does not pay tax more than once on the same profits. An APA does not provide any special treatment or change the amount of tax due under the law.

A Statement of Practice explains how HMRC applies the APA legislation and operates the UK APA program. The UK constantly reviews its application of theAPAlegislation and updated the Statement of Practice in October 2023. The UK’s approach is primarily to work with the tax administrations of other countries to make bilateral or multilateral agreements rather than unilateral agreements. This requires discussion and negotiation with treaty partners which impacts on the time taken to reach agreement.

This year HMRC has agreed 15 APAs.

Number of APA cases agreed from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Average time to reach APA agreement from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Expanded data for APAs from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Mutual Agreement Procedure

Most double taxation agreements include a MAP article allowing tax administrations to resolve cases of double taxation by consultation and mutual agreement.

Statement of Practice 1/2018 and guidance in the International Manual outline HMRC’s procedure in relation to the elimination of double taxation under MAP. The majority of cases require HMRC to work with tax administrations in other countries to determine each country’s taxing rights, which affects the time needed to resolve these cases.

MAP applies to other issues as well as transfer pricing. The figures reported here cover transfer pricing and permanent establishment profit attribution issues only.

This year HMRC has resolved 131 MAP cases.

Number of MAP cases resolved from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Average time to resolve MAP cases from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Expanded data for MAP cases from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Advance Thin Capitalisation Agreements

An ATCA is an agreement between a business andHMRCwhich sets out how the transfer pricing rules apply to funding issues, including the appropriate levels, terms, and conditions of debt financing between connected parties, so that the UK receives the right amount of tax at the right time.

AnATCAis a form ofAPAand, likeAPAs in general, it enables tax authorities to examine certain transactions and agree the appropriate transfer pricing position earlier than the usual tax return/assessment cycle would allow. It does not change the amount of tax a business must pay.

Statement of Practice 1/2012explainsHMRC’s approach.Detailed practical guidance is contained in the international manualat INTM520000.

Number of ATCA’s agreed from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Average time to reach ATCA agreement from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Advance Thin Capitalisation Agreements cases from the 2017 to 2018 tax year to the 2022 to 2023 tax year

The number of ATCAs agreed has fallen in recent years, which has coincided with the introduction of the Corporate Interest Restriction (CIR) which took effect from 1 April 2017.

The CIR rules restrict a group’s deductions for interest expense and other financing costs to an amount which is commensurate with its activities taxed in the UK.

The rules operate mechanically, and the group must apply the rules and self-assess the amount of any restriction. For some companies, this may result in interest deductions being restricted to a lower amount than would otherwise be permitted under the arm’s length principle.

The Profit Diversion Compliance Facility

In January 2019 HMRC launched the Profit Diversion Compliance Facility (PDCF). Further information on the PDCF is provided in guidance.

HMRC is identifying and writing to specific multinationals (PDCF letters) that could be diverting profits away from the UK.

Key figures and outcomes for the periods to 31 March 2023

Points to note in relation to PDCF:

• some multinationals registered to use the facility to put their tax affairs on a better footing without waiting for a PDCF letter from HMRC

• due to the impact of the COVID-19 pandemic, HMRC granted a number of PDCF registrants additional time to complete their disclosure reports

• in 2022 to 2023 HMRC focussed resource on the progression and conclusion of cases within the facility, rather than issuing further targeted letters. HMRC are starting to issue further PDCF letters during 2023 to 2024

• the resolved cases have completed the PDCF process in an average of 20 months from registration meeting to receiving a decision from HMRC and 97% of those had their final proposals accepted

• over £732 million additional revenue has been secured from resolution proposals and changes in customer behaviour since 2019 when PDCF was introduced

HMRC is investigating those registrants where their final proposals were rejected, and most multinationals that received PDCF letters and chose not to register.

The PDCF is proving to be very successful. About two-thirds of the large businesses targeted decided to use the facility to bring their tax affairs up to date quickly and efficiently. This also allows HMRC to focus even more resources on those which avoid paying tax.

Diverted Profits Tax

DPT is designed to encourage large companies that try to minimise their tax liabilities through the use of contrived arrangements to change their behaviour and pay additional CT, or face paying tax at a higher rate. It is not targeted specifically at any particular sectors or companies, but rather at particular behaviours and arrangements.

DPT net amount

TheDPTnet amount is theDPTreceived during the year from charging and supplementary notices that is not repaid. WhereDPTis repaid it is usually because an enquiry has been settled on a transfer pricing basis and additionalCThas been paid. This is in line with the purpose of theDPT, which complements transfer pricing enquiries to address the diversion of profits out of the UK.

DPT net amount from the 2017 to 2018 tax year to the 2022 to 2023 tax year

Notifications

Companies must notify HMRC if they have arrangements that potentially fall within the scope of the DPT legislation, subject to limited statutory exceptions. More than one company within a multinational group may need to notify.

Notifications from the 2017 to 2018 tax year to the 2022 to 2023 tax year

The numbers above are the DPT notifications and analyses HMRC has received from groups where one or more companies within the group have indicated that they are involved in arrangements that may be in scope of the DPT legislation. The obligation to notify does not necessarily mean that a DPT charge will arise.

Notices

WhereHMRChas reason to believe thatDPTis due, a preliminary notice is issued. Depending on the company’s response,HMRCmay then issue a charging notice requiringDPTto be paid by the company within 30 days.

Companies have 3 months from the end of the relevant accounting period to notify HMRC that they are potentially within scope of the legislation.HMRCthen has 2 years to investigate to determine whether it is reasonable to issue aDPTpreliminary notice.

In 2022 to 2023HMRCissued 14 DPTpreliminary notices to 8 customer groups and 11 DPTcharging notices to 6 customer groups.

TheDPTlegislation provides a 15-month review period after the notice is issued during whichHMRCwill continue to work with businesses to resolve the dispute. If, during the review period,HMRCis satisfied that the amount ofDPTcharged is excessive or insufficient it can issue amending notices to reduce, or a supplementary notice to increase, theDPTcharged. Businesses have the right of appeal against aDPTcharge after the conclusion of the 15-month review period.

TheDPTprocedures are subject to a strict governance process, and all decisions to issueDPTnotices are made by a designated officer, who is supported by an advisory group.

Investigations into diverted profits

When investigating arrangements to divert profits, HMRC considers relevant accounting periods before and after DPT was introduced. Most of these investigations are resolved by the business agreeing to change its transfer pricing and pay additional CT.

The DPT is helping to encourage cooperation with HMRC investigations and facilitating settlements. Some businesses have chosen to change their behaviour and pay CT arising on their economic activities in the UK rather than pay tax at a higher rate.

Diverted profits results from the 2017 to 2018 tax year to the 2022 to 2023 tax year

From the 2015-16 tax year when DPT was introduced to the end of the 2022-23 tax year, more than £8.5 billion has been secured.

The additional tax and VAT secured refers to where the business has agreed to stop diverting profits, and calculates its profits for CT differently leading to additional CT for the past and future; and in some cases, restructuring results in additional VAT that will be billed through UK companies. It therefore refers to a wider span of years than the years covered by the DPT policy measure. It also includes a small amount relating to additional employment taxes.

From April 2015 to March 2023 DPT has helped HMRC to settle over 200 investigations for additional CT – this yield is included in additional CT from adjustments to transfer pricing. HMRC is currently carrying out about 90 reviews into multinationals with arrangements to divert profits (including those who have registered under the PDCF) and the total amount of tax under consideration in these cases was £2.6 billion at the end of March 2023.

HMRC’s work on Diverted Profits has also had a wider impact.HMRCis continuing to explore with professional bodies, large firms of advisers and other tax authorities how to improve the quality of tax advice provided by these firms and how to discourage tax avoidance by large businesses and wealthy individuals.HMRC is also reviewing the effectiveness of its enquiries under the Review of Tax Administration for Large Business programme. HMRC has recently launched a pilot for Accelerated Routes for Long Running Transfer Pricing Enquiries, and will be publishing practical Transfer Pricing Guidelines for Compliance.

Additionally, HMRC is litigating various international tax risk disputes where the business was not prepared to change their arrangements and pay additional CT.If HMRC have major concerns about the way that arrangements to divert profits have been implemented, and/or suspicions that we have been misled, we refer our concerns to colleagues in Fraud Investigation Service in accordance with our standard procedures. There are a number of large businesses under civil or criminal investigation with HMRC’s Fraud Investigation Service.

Background notes

We have improved how we measure compliance transfer pricing yield. As such, we have reported from 2018 to 2019, to 2022 to 2023 figures for transfer pricing yield within the publication on a year of impact basis. Because of this change the 2018 to 2019, to 2022 to 2023 yield are not comparable with the yield in previous years.

The total figures used in the table within the Investigations to diverted profits section covers the impact of theDPTlegislation over a number of years, and the total figures include all cash collected and the total future revenue benefit based on old reporting methodology. The change to reporting inHMRCAnnual Report and Accounts in 2018 to 2019 has no impact on the total future revenue benefit that we score, only the year in which we score it. Therefore, the cumulative totals in this document represent the overall amounts secured as a result of theDPTlegislation although some of this will only score as compliance yield in future years. The same approach has been taken with the Profit Diversion Compliance Facility figures stated in this publication.

We changed the way we reported the number of staff working international tax issues to improve accuracy.

In previous years we recorded APA applications withdrawn under ‘applications turned down’. From 2018 to 2019 we have shown withdrawn applications separately.

The MAP cases resolved and admitted represent the number of MAP cases HMRC has recorded as beginning during the tax year. The OECD MAP Statistics Reporting Framework report uses the calendar year and includes non-transfer pricing cases. The reports are published on the OECD website.

We now refer to the DPT yield to mean the DPT net amount. As set out in the Diverted Profits Yield: methodological note, from 2018 to 2019 the decision was taken to stop estimating yield from compliance-related behavioural change and instead this element of additional Corporation Tax relating to behavioural change is included in the wider figure for transfer pricing yield.

Multiple entities within the same group may be part of the arrangements, which can mean that multiple DPT notices are required in relation to a single arrangement.