HMRC £1 billion TP yield may signal fast-track APA system

HM Revenue & Customs (HMRC) has collected more than £1 billion ($1.6 billion) in transfer pricing yield between March 2011 and 2012. Tax practitioners hope the high figure means more resources for the authority's advance pricing agreements (APA) programme. Statistics also show that, since March 2010, the age of open enquiries has reduced, as has the age of settled enquiries.

APA statistics show the number of rejected applications has fallen from three in 2009/10 to zero in 2011/12 and the average time to reach an agreement has fallen from 20.3 months to 16.9 months over the same time period (with 50% being agreed in 10.7 months by 2011/12).

"In our experience the approach of HMRC in dealing with APAs has been very good," said Jason Luke, director of tax for Rolls Royce. "In line with other areas they maintain a risk based approach, are pragmatic and keen to set and meet deadlines, all of which allow for an efficient process."

HMRC said they look for the following characteristics when considering an APA application:

• The transfer pricing issues are complex rather than straightforward. To HMRC, complex means there is doubt as to how the arm's-length standard should be applied. Conversely, where reliable market comparables can be readily identified for the transaction(s) in point, that should enable transfer pricing methods to be employed in accordance with the OECD Transfer Pricing Guidelines, and HMRC is likely to regard such a situation as straightforward;

• Without an APA, it is likely that the taxpayer's transfer pricing policies or issues would not be regarded as low risk and/or there is a high likelihood of double taxation; and

• The taxpayer seeks to implement a method which is highly tailored to its own particular circumstances.

"Challenges remain however," said Batanayi Katongera of Olswang. "Particularly with getting cases over the line more quickly as, ideally, I am sure we would all like to see the majority of cases resolved and APAs agreed in less than 12 months as standard. It's a learning process for all stakeholders and HMRC should be commended for making great strides towards a more efficient experience for its customers and their advisers."

There are still some much older enquiries in the system.

"We are concerned that the figures indicate there are some very old enquiries that still have not reached settlement despite the step gate process being applied to TP enquiry management since 2008"

The trend for yield in transfer pricing is increasing (see Table 1).

Table 1: yield in transfer pricing
Year	2007/8	2008/9	2009/10	2010/11	2011/12
Total amount	£519m	£1,595m	£1,039m	£436m	£1,095m
Large business service	£494m	£1,564m	£973m	£273m	£944m
Local compliance	£25m	£31m	£66m	£163m	£151m

While a small number of very large cases are responsible for the year to year fluctuation, it is quite telling that the local compliance yield contribution has increased dramatically over the years and seems to be holding steady at well above the £100 million mark.

"This suggests that HMRC's expansion of transfer pricing capabilities at the local compliance level is bearing fruit," said Katongera. "We expect to see continued increases in activity at the local compliance level accompanied by some mega-cases on the large business side, which in turn will increase pressure on HMRC to think about introducing a leaner fast track system for settling cases and agreeing APAs (ideally multilaterally) so as to maintain the current level of progress that these statistics suggest."

In response HMRC said: "HMRC is committed to adequately resourcing all of its transfer pricing activities. All of our transfer pricing specialists receive intensive training and we are currently in the process of recruiting some transfer pricing economists.

"Customers can achieve early reassurance by engaging with HMRC on transfer pricing issues in real-time or achieve certainty by entering into an advanced pricing agreement. Experience has that real-time working can reduce the time taken to review an issue because information and, where appropriate, relevant business personnel are more easily accessed."

While ATCAs are counted within the APA legislation, they are administrated separately and are only unilateral (see Table 2).

Table 2: ATCAs
	2010/11	2011/12
ATCAs agreed during year	127	160
Agreements in force during 2010/11	231	279
Average time to reach agreement:	9.8 months	10.1 months
50% agreed within:	6.9 months	7.7 months

"The increasing popularity of ATCAs, as shown in the HMRC statistics, reflects our own experience. In particular there is significant interest from private equity backed businesses seeking certainty in their tax affairs," said Liz Hughes, of grant Thornton. "We are expecting numbers of ATCAs to increase over the next few years as the demand for new ATCAs remains high and existing ones come to an end and need to be renegotiated."