Transparency data

Transfer Pricing and Diverted Profits Tax statistics, 2018 to 2019

Published 27 January 2020

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 that arise 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 - 2013 to 2014, to 2018 to 2019

This graph shows the transfer pricing yield - 2013 to 2014, to 2018 to 2019.

	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19
Amount (£m)	1,137	707	853	1,618	1,774[footnote 1]	1,169[footnote 2]

Enquiries (including real-time interventions)

Average age of settled enquiries

12 months to 31 March:	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19
Average age of settled enquiries (months)	25.3	22.4	27.6	28.8	24.7	33.1

Number of enquiry cases (including real-time) settled

12 months to 31 March:	2014/15	2015/16	2016/17	2017/18	2018/19
Number of cases settled	190	129	111	134	138

We are increasingly channelling our resources to bring some of our oldest cases to a full and final conclusion. The introduction of DPT has also prompted taxpayers to provide information in a timely manner and reach an appropriate transfer pricing conclusion in some older cases.

Staff working on international issues

In 2018 to 2019 there were 441^{[footnote 3]} 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 those 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.

Advance Pricing Agreements (APAs)

An Advanced 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 OECD in managing compliance with transfer pricing rules^{[footnote 4]}. 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 programme. 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 30 APAs.

This graph shows the number of APA cases and average time to reach agreements from the 2013 to 2014 tax year to the 2018 to 2019 tax year.

	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19
APAs agreed during year	29	37	22	19	27	30
Average time to reach agreement (months)	27.8	18.0	33.0	32.8	37.1	33.6
Applications made during year	43	66	47	32	16	24
Applications withdrawn[footnote 5]	-	-	-	-	-	5
Applications turned down	0	2	3	5	6	0

Advance Thin Capitalisation Agreements (ATCAs)

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 graph shows the number of ATCA cases and average time to reach agreements from the 2013 to 2014 tax year, to the 2018 to 2019 tax year.

	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19
ATCAs agreed during year	198	213	164	124	79	59
Average time to reach agreement (months)	11.4	11.3	11.7	14.9	17.5	26.3
Agreements in force during year	510	577	568	479	334	255

Mutual Agreement Procedure (MAP)

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 and/or the EU Arbitration Convention. 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 graph shows the number of MAP cases and average time to resolve them from the 2013 to 2014 tax year, to the 2018 to 2019 tax year.

	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19
Cases resolved during the year	46	38	49	36	71	95
Cases admitted during the year[footnote 6]	61	71	71	80	103	91
Average time to resolve cases (months)	29	25.4	18.5	24.4	27.5	27

Under the Action 14 Minimum Standard – Making Dispute Resolution More Effective, the MAP Peer Review process has recognised the current strengths of MAP in the UK, showing that the UK is a good treaty partner with a well-resourced team which takes a principled and pragmatic approach to MAP. The UK has worked hard to address the small number of issues which were identified in Stage 1 of the process and Stage 2 recognised that almost all identified issues have been solved. In order to be fully compliant with all four key areas of an effective dispute resolution mechanism identified under the Action 14 Minimum Standard the UK fully adopted the recommendations through the Multilateral Instrument.

Exchange of information

HMRC works with other tax authorities, sharing information and expertise, to identify risk and challenge arrangements. Country by Country reports have increased the information available to support HMRC’s risk assessment processes.

Arbitration

HMRC is committed to making use of the full range of dispute resolution tools, recognises the value of arbitration and will participate in appropriate cases.

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 yield

Year	2015/16	2016/17	2017/18	2018/19
Total Amount	£0m	£138m	£219m	£12m

These figures reflect the net amount received as a result of HMRC issuing DPT charging notices which are not repaid. Where DPT is repaid it is usually because the 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 Diverted Profits Tax, which complements transfer pricing enquiries to address the diversion of profits out of the UK.

The DPT also generates additional corporation tax from businesses choosing to change their behaviours rather than face a DPT charge. Read more details of the wider activities and results of the Diverted Profits Project during 2018 to 2019.

Previously, HMRC included within DPT yield an amount of additional corporation tax arising from transfer pricing enquiries that was estimated to result from behavioural change relating to the DPT. Due to the close association between DPT and transfer pricing enquiries, we no longer consider this subdivision of transfer pricing yield to be appropriate. We have now decided to leave this element of additional corporation tax relating to behavioural change in the wider figure for transfer pricing yield, which is reported at the top of this publication, rather than attempt to identify a specific amount of that yield referable to the DPT. HMRC continues to identify an amount of CT arising from spontaneous behavioural change as a result of the introduction of DPT. This is reported within CT receipts. More information can be found in the methodological note.

Notifications

Companies have to 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.

	2015/16	2016/17	2017/18	2018/19
DPT notifications received	16	203	73[footnote 7]	59

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 believes that DPT may be due, a preliminary notice is issued. Depending on the company’s response, HMRC may then issue a charging notice setting out the amount of 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 2018 to 2019 HMRC issued 203 DPT preliminary notices to 11 customer groups and 204 DPT charging notices to 13 customer groups^{[footnote 8]}.

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 considered by an advisory group and agreed by the Designated Officer.

1. This figure has been restated, which is an increase from the previously published figure of £1,682m. This rectifies internal under-recording of yield in a small number of cases. ↩

2. We have improved how we measure compliance yield. As such, we have reported the 2018 to 2019 figures for yield within the publication on a year of impact basis. Because of this change, the 2018/19 yield is not comparable with the yield in previous years. ↩

3. This year, we have changed the way we have 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 this year’s figure includes other staff working on international issues. ↩

4. Number 4 of the OECD/ G20 Base Erosion and Profit Shifting (BEPS) Action Item 14 Final Report Making Dispute Resolution More Effective recommends that “countries should implement bilateral APA programmes”. ↩

5. In previous years we recorded applications withdrawn under “applications turned down”. In 2018 to 2019 we have shown withdrawn applications separately. ↩

6. This represents 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. ↩

7. The figure for the number of notifications for 2017 to 2018 has been restated having been revised from 220 to 73. The original figure was incorrect due to an error which led to the report showing the number of individual notifications rather than the number of customers making notifications. The error has not affected tax collected. ↩

8. 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. ↩