In some ways, given the flattering comments of the tax directors and advisers who polled towards the end of our Top 10 most aggressive authorities for transfer pricing, it was surprising the Revenue was included at all.
But that was only a surface reading. On closer interrogation, the reason why the UK authority was included was partly historical. “The old Inland Revenue started transfer pricing activities quite a bit later that than the IRS in America. When it used a role model it was the IRS which gave no prisoners,” said a Big Four transfer pricing practitioner. He did not want to be named because, like the other contributors, he has an ongoing relationship with the HMRC.
“There was always a suspicion that with the Revenue that it regarded every company as motivated by tax evasion. That has changed and there is a much healthier approach now. But some clients are worried that the old Revenue will reassert itself.”
Under former chairman Paul Gray and current acting chairman Dave Hartnett, and indeed slightly before, it is seen as a move responsive organisation and much more willing to listen. “I cannot say that my company’s experience of dealing with the HMRC has always been positive. So much depended on the key Revenue personnel dealing with our returns and the issues raised,” said one tax director.
There are several key messages which have emerged from TP Week’s survey. By and large, the advisers take the view that encounters with HMRC have improved and the dialogue with the representatives of tax advisers has vastly improved.
“I believe Dave Hartnett when he says he wants to run a more businesslike operation and in terms of many other tax authorities it is more sophisticated and it has become much better at what it does,” said a transfer pricing director at a leading international law firm.
But there is a downside. A service which evaluates cases on the basis of risk by definition means that some will be high risk and some low risk. In his interview with TP Week two months ago Roy Warden, one of the transfer pricing leaders at HMRC, said the organisation had set demanding targets for identifying those which are low risk and those which are high risk.
That’s good news for the low risk but the Revenue will be focusing its resources – its firepower - on the higher risk cases.
Hartnett told our sister publication International Tax Review that he was inviting tax directors to have high level dialogue with him and his colleagues. He said that he would go as far as he could to accommodate companies with tax problems – including transfer pricing – but sometimes he sat across the table from people who he knew were not telling him the truth.
He said that incidence of litigation has been relatively small in Britain. But as result of the risk strategy now adopted, he fully expected the number of cases to grow. He firmly intended to take companies to law which did not comply and where disagreement could not be resolved.
Corporate tax directors believe that he will stick to his word. For those companies which disagree with the Revenue about how much tax is owed tough battles lie ahead.
“I have two clients – both fairly large UK-based multinationals – both in disagreement with HMRC at present,” said one tax adviser. “Although both of these cases are vigorously contested, in one of them an agreement could be reached if both parties sat down and talked. In the other, the mutual suspicion is so great that I do not think that will happen. The Revenue thinks my second client is wilfully evading tax and is not prepared to take much on trust.”
In a generally more open and positive environment, the personalities of the individuals can play a massive part in outcomes.
The Revenue is widely praised for its work internationally in developing a more pragmatic insight and a much deeper appreciation of company objectives. “I think that HMRC is being honest when it says that it knows that multinationals have genuine business reasons for restructurings which do not favour particular jurisdictions. It has also taken a commercial attitude to permanent establishment,” said one tax director.
2008 – if all goes to plan – will be year which polarises attitudes. For low risk businesses, the HMRC may become their friend. But for high risk companies or those with disputed assessments it will be a different story altogether.
