The UK’s Finance Act 2021highlighted HMRC’s increasing access to financial data of taxpayers, but the emphasis on the exchange of information creates significant pressure on corporations to justify their TP policy.
Speeding up data-gathering may lead to greater scrutiny and a greater compliance burden for such companies.
“It’s indirect pressure. It means you need to be thinking about compliance on a much more proactive and contemporaneous basis than perhaps you did five years ago,” said Ben Henton, transfer pricing director at BDO.
While HMRC initially needed a third-party approval to gain access to information for investigations, the Finance Act allows the tax authority to issue a notice without going to the first-tier tribunal, according to Henton.
This aligns with the OECD’s BEPS project that requires further exchange of information. In 2019, HMRC initiated the ‘No Safe Havens’ project aimed at tackling multinational tax avoidance through tax transparency and exchange of tax information including the Common Reporting Standard (CRS).
In 2018, HMRC disclosed it had received information from about three million taxpayers in the UK with offshore accounts. The UK also promoted itself as one of the first countries to implement country-by-country reporting (CbCR). While access to CRS data has increased over the years, HMRC has aimed to obtain further information without delay.
Pressure points
The UK has one of the largest networks of international treaties across the globe, with traditional offshore tax havens having introduced exchange of information agreements with HMRC in order to not figure among the blacklisted countries.
HMRC has positioned itself as a leading player in international efforts to regulate TP and BEPS issues, according to James Austen, partner at Collyer Bristow, through the introduction of the Profit Diversion Compliance Facility (PDCF) in January 2019.
“The remit of this unit is ‘to give multinational enterprises the opportunity to bring their UK tax affairs up to date.’The reality for those being investigated by the unit is that the’ opportunity’ will be compelled with the stick rather than the carrot,” said Austen.
This year’s Finance Act therefore acts as the next step in HMRC’s goal to obtain crucial data on UK taxpayers’ financial transactions without unnecessary and complex procedures.
“There won't be this check of the first-tier tribunal on that notice that there was traditionally. Now one of the reasons for that was to speed up the process in which data is collected,” said Henton.
“That’s going to be a big issue for corporate taxpayers going forward as most corporates are going to have a bank account with their financial institution in the UK, and so getting those details quite easily could potentially present greater scrutiny problems,” he added.
The increasing access to data from HMRC will also ‘inevitably’ lead to further scrutiny, according to Henton, as well as create a greater burden for UK taxpayers.
Taxpayers will face significant pressure when demonstrating that their TP policy follows the arm’s-length principle (ALP).
“If there is correspondence internally that undermines that, then that could undermine your TP. For instance, we’re often involved with an investment manager who is offshore because the fund might be located offshore,” said Henton. “The reason for that isn’t exactly tax-driven, it’s often driven by the lower costs associated with establishing the fund offshore.”
There will be a lot of pressure on companies in cases where the investment manager is located offshore and the decision-making should be offshore, but you have all your employees in the UK.”
“If there is correspondence that shows the UK is making all the decisions, it undermines the fact that you have an investment manager offshore and that you are trying to book profit offshore. But it turns out that under TP rules, all the profit should be in the UK,” added Henton.
Companies may have to rethink core TP policies impacted by HMRC’s demand for more and more data. “Core bits of transfer pricing is that functional analysis of understanding what individual group members, what they're actually doing for other group members,” said Laurence Field, partner at Crowe.
The additional data gained by the UK tax authority could also give them the opportunity to validate certain statements made by corporations when outlining their operations, according to Field. While these statements were true when they were made, they could have not been updated by the time HMRC asked questions.
Speeding up data collection
Speeding up the process of collecting data could represent a key challenge for UK businesses, meaning having strong policies in place and implementing rigorous auditing and reporting will be necessary to adapt to the latest regulations, according to Austen.
“The message for international taxpayers is that they should assume that HMRC and revenue authorities will be able to detect non-compliance and they will take steps to tackle it accordingly,” he said.
The differences in tax policy across multiple jurisdictions and the lack of stability within the tax framework internationally and domestically will yet add complexity to the process.
“Unfortunately, governments seem unable or unwilling to give businesses what they most need, which is the certainty of treatment.Too often, tax regimes are tweaked or overhauled, with enormous but largely invisible knock-on costs for enterprises,” said Austen.
While the increased amount of data available will not change UK taxpayers’ reporting obligations, the increasing exchange of information could lead to greater pressure on businesses when demonstrating their TP policy is at arm’s length basis.
A greater administrative burden can also be expected as more frequent updates on documentation will be required by HMRC. UK companies are facing more pressure over transfer pricing, and there is no sign of the pressure letting up.
