Transfer Pricing and Diverted Profits Tax statistics, 2020 to 2021
Published 28 April 2022
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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).
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 2015 to 2016 tax year to the 2020 to 2021 tax year
| Year | Amount (£m) |
|---|---|
| 2015-16 | 853 |
| 2016-17 | 1,618 |
| 2017-18 | 1,774 |
| 2018-19 | 1,169 |
| 2019-20 | 1,454 |
| 2020-21 | 2,162 |
Enquiries (including real-time interventions)
Number of enquiry cases (including real-time interventions) settled from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| 12 months to 31 March | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | |
|---|---|---|---|---|---|---|---|
| Number of cases settled | 129 | 111 | 134 | 138 | 125 | 124 |
Average age of settled enquiries from 2015 to 2016, to 2020 to 2021
| 12 months to 31 March | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 |
|---|---|---|---|---|---|---|
| Average age of settled enquiries (months) | 27.6 | 28.8 | 24.7 | 33.1 | 31.4 | 36.0 |
Staff working on international issues
In 2020 to 2021 there were 431 (456 in 2019 to 2020) full-time equivalent staff working on international issues involving Multinational Enterprises (MNEs) including transfer pricing, diverted profits tax, Controlled Foreign Companies (CFCs) and cross border debt.
This figure includes time spent on international issues by dedicated international specialists, Corporation Tax 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.
HMRC has invested significant time in training staff to deal with international issues, including transfer pricing, and continues to recruit staff in this risk area.
Advance Pricing Agreements
An Advance Pricing Agreement (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 and in advance of a tax return being made. APAs are recognised as international best practice by the Organisation for Economic Co-operation and Development (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, published in November 2016, explains how HMRC applies the APA legislation and operates the UK APA program. The UK’s approach is primarily to work with the tax administrations of other countries to make bilateral, or multilateral agreements. This requires discussion and negotiation with treaty partners which impacts on the time taken to reach agreement.
This year HMRC has agreed 24 APAs.
Number of APA cases agreed from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| Year | APAs agreed during year |
|---|---|
| 2015-16 | 22 |
| 2016-17 | 19 |
| 2017-18 | 27 |
| 2018-19 | 30 |
| 2019-20 | 26 |
| 2020-21 | 24 |
Average time to reach APA agreement from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| Year | Average time to reach agreement (months) |
|---|---|
| 2015-16 | 33.0 |
| 2016-17 | 32.8 |
| 2017-18 | 37.1 |
| 2018-19 | 33.6 |
| 2019-20 | 47.9 |
| 2020-21 | 55.5 |
Expanded data for APAs from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| 12 months to 31 March | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 |
|---|---|---|---|---|---|---|
| APAs agreed during year | 22 | 19 | 27 | 30 | 26 | 24 |
| Average time to reach agreement (months) | 33.0 | 32.8 | 37.1 | 33.6 | 47.9 | 55.5 |
| Applications made during year | 47 | 32 | 16 | 24 | 29 | 24 |
| Applications withdrawn | – | – | – | 5 | 4 | 11 |
| Applications turned down | 3 | 5 | 6 | 0 | 0 | 4 |
Advance Thin Capitalisation Agreements
An Advance Thin Capitalisation Agreement (ATCA) is an agreement between a business and HMRC which 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.
An ATCA is a form of APA and, like all APAs, 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 1/2012 explains HMRC’s approach. Detailed practical guidance is contained in the international manual at INTM520000.
This year HMRC has agreed 23 ATCAs.
Number of ACTAs agreed from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| Year | ATCAs agreed during year |
|---|---|
| 2015-16 | 164 |
| 2016-17 | 124 |
| 2017-18 | 79 |
| 2018-19 | 59 |
| 2019-20 | 45 |
| 2020-21 | 23 |
Average time to reach ATCA agreement from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| Year | Average time to reach agreement (months) |
|---|---|
| 2015-16 | 11.7 |
| 2016-17 | 14.9 |
| 2017-18 | 17.5 |
| 2018-19 | 26.3 |
| 2019-20 | 24.4 |
| 2020-21 | 28.1 |
Expanded data for ATCAs from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| 12 months to 31 March | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 |
|---|---|---|---|---|---|---|
| ATCAs agreed during year | 164 | 124 | 79 | 59 | 45 | 23 |
| Average time to reach agreement (months) | 11.7 | 14.9 | 17.5 | 26.3 | 24.4 | 28.1 |
| Agreements in force during year | 568 | 479 | 334 | 255 | 98 | 97 |
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. It is possible that affected groups have chosen not to incur the expense of applying for an ATCA.
Mutual Agreement Procedure
Most double taxation agreements include a Mutual Agreement Procedure (MAP) article allowing tax administrations to resolve cases of double taxation by consultation and mutual agreement.
A 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 62 MAP cases.
Number of MAP cases resolved from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| Year | Cases resolved during the year |
|---|---|
| 2015-16 | 49 |
| 2016-17 | 36 |
| 2017-18 | 71 |
| 2018-19 | 95 |
| 2019-20 | 72 |
| 2020-21 | 62 |
Average time to resolve MAP cases from the 2015 to 2016 tax year, to the 2020 to 2021 tax year
| Year | Average time to resolve cases (months) |
|---|---|
| 2015-16 | 18.5 |
| 2016-17 | 24.4 |
| 2017-18 | 27.5 |
| 2018-19 | 27.0 |
| 2019-20 | 22.86 |
| 2020-21 | 34.4 |
Expanded data for MAP cases from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| 12 months to 31 March | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 |
|---|---|---|---|---|---|---|
| Cases resolved during the year | 49 | 36 | 71 | 95 | 72 | 62 |
| Cases admitted during the year | 71 | 80 | 103 | 91 | 80 | 128 |
| Average time to resolve cases (months) | 18.5 | 24.4 | 27.5 | 27.0 | 22.86 | 34.4 |
Diverted Profits Tax
The 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 Corporation Tax, 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
The DPT net amount is the DPT received during the year from charging and supplementary notices and not repaid. Where DPT is repaid it is usually because an enquiry has been settled on a transfer pricing basis and additional Corporation Tax has been paid. This is in line with the purpose of the DPT, which complements transfer pricing enquiries to address the diversion of profits out of the UK.
Net DPT amounts from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | |
|---|---|---|---|---|---|---|
| DPT net amount | £0m | £138m | £219m | £12m | £17m | £151m |
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.
DPT notifications received from the 2015 to 2016 tax year to the 2020 to 2021 tax year
| 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | |
|---|---|---|---|---|---|---|
| DPT notifications received | 16 | 203 | 73 | 59 | 47 | 25 |
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
Where HMRC has reason to believe that DPT is due, a preliminary notice is issued. Depending on the company’s response, HMRC may then issue a charging notice requiring DPT to 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. HMRC then has 2 years to investigate to determine whether it is reasonable to issue a DPT preliminary notice.
In 2020 to 2021 HMRC issued 78 DPT preliminary notices to 27 customer groups and 59 DPT charging notices to 23 customer groups.
Differences between the numbers of DPT preliminary and charging notices can be due to timing differences, for example where a preliminary notice is issued at year end, or as a result of successful representations made to HMRC on the specified issues, or a case being settled on a Corporation Tax basis before the charging notice is issued.
The DPT legislation provides a 15-month review period after the notice is issued during which HMRC will continue to work with businesses to resolve the dispute. If, during the review period, HMRC is satisfied that the amount of DPT charged is excessive or insufficient, it can issue amending notices to reduce, or a supplementary notice to increase, the DPT charged. Businesses have the right of appeal against a DPT charge after the conclusion of the 15-month review period.
The DPT procedures are subject to a strict governance process, and all decisions to issue DPT notices 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 Corporation Tax.
The DPT is helping to encourage cooperation with HMRC investigations and facilitating settlements. Some businesses have chosen to change their behaviour and pay Corporation Tax arising on their economic activities in the UK rather than pay tax at a higher rate.
Breakdown of Diverted Profits results since formation in tax year 2015 to 2016 to tax year 2020 to 2021
| 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | Total | |
|---|---|---|---|---|---|---|---|
| Net amount of DPT from Charging Notices (£m) | – | 138 | 219 | 12 | 17 | 151 | 537 |
| Additional tax, primarily CT from transfer pricing settled investigations into diverted profits (£m) | 379 | 336 | 968 | 548 | 664 | 1,467 | 4,362 |
| Additional VAT from business restructuring (£m) | – | – | 193 | 1,777 | 659 | 33 | 2,662 |
| Total (£m) | 379 | 474 | 1,380 | 2,337 | 1,340 | 1,651 | 7,561 |
The additional tax and VAT secured refers to where the business has agreed to stop diverting profits, and calculates its profits for Corporation Tax 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 2021 DPT has helped HMRC to settle over 120 investigations for additional Corporation Tax – this yield is included in additional Corporation Tax from adjustments to transfer pricing. Business restructuring (as a result of investigations or the introduction of DPT) has led to additional VAT of over £2.6 billion.
HMRC is currently carrying out around 100 investigations into multinationals with arrangements to divert profits (excluding those who have registered under the PDCF) and the total amount of tax under consideration in these cases was £3.8 billion at the end of March 2021.
Profit Diversion Compliance Facility
In January 2019 HMRC launched a new compliance facility – the Profit Diversion Compliance Facility (PDCF).
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 period to 31 March 2021
| 12 months to 31 March | 2018-19 | 2019-20 | 2020-21 |
|---|---|---|---|
| Number of PDCF letters issued | 36 | 71 | 28 |
| Number of registrations | 21 | 53 | 17 |
| Number of cases resolved | 0 | < 5 | 22 |
Main points:
- the first registration meetings were held in the first quarter of 2019 to 2020 and so the first resolutions occurred towards the end of 2019 to 2020 and beginning of 2020 to 2021
- due to the impact of the COVID-19 pandemic, HMRC granted a number of PDCF registrants additional time to complete their disclosure reports
- some multinationals registered to use the facility to put their tax affairs on a better footing without waiting for a PDCF letter from HMRC
- the resolved cases have completed the PDCF process in an average of 12.0 months from registration meeting to receiving a decision from HMRC and 96% of those had their final proposals accepted
- £305 million additional revenue has been secured from resolution proposals and changes in customer behaviour
HMRC is investigating those registrants where their final proposals were rejected, and most multinationals that received PDCF letters and chose not to register
Background notes
We have improved how we measure compliance transfer pricing yield. As such, we have reported from 2018 to 2019, to 2020 to 2021 figures for transfer pricing yield within the publication on a year of impact basis. Because of this change the 2018 to 2019, to 2020 to 2021 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 the DPT legislation 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 in HMRC Annual 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 the DPT legislation 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.
The HMRC 2020 to 2021 Annual Report and Accounts has applied an adjustment to the Future Revenue Benefit (FRB) brought forward from previous years to account for the risk that FRB assessed in previous years would have been overestimated due to the fall in receipts, as a result of the unprecedented economic shock caused by Covid. The Transfer Pricing yield total reported in this report has not been adjusted in order to maintain consistency with how this yield has been reported previously.
We changed the way we reported the number of staff working international issues to improve accuracy. The number of staff in the 2017 to 2018 report included only International Specialists, whereas the figures from later reports include other staff working on international issues.
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.