HMRC transfer pricing and DPT statistics for 2022/23

HMRC has published their most recent transfer pricing and Diverted Profits Tax (DPT) statistics for the period 2022 to 2023, following on from the release of similar data for periods since the DPT legislation came into effect from April 2015. The UK's transfer pricing rules and DPT are important elements in a range of measures implemented by the UK to ensure multinationals are subject to tax on the share of their profits from their UK activities.

The statistics make interesting reading and provide valuable insights into HMRC's approaches and priorities to international taxation, which should be carefully considered by any multinational operating in the UK.

Comments on the statistics provided by HMRC

International issues involving Multinational Enterprises (MNEs) including transfer pricing, diverted profits tax, CFCs and cross-border debt continue to be a clear priority for HMRC, based on the figures they have released about the significant number of ongoing investigations and the resources they are allocating.

• The number of transfer pricing enquiry cases settled in 2022/23 was 153, with an average resolution time of 38.9 months, the longest so far and continuing an upward trend.
• Staffing for international issues at HMRC decreased slightly to 397 full-time equivalents in 2022/23, a disappointing reduction amid increasing time to settle disputes.

Overall, HMRC has generated significant additional tax revenues through transfer pricing, which includes through its normal course of investigations to challenge transfer pricing compliance (including real time interventions), Advance Pricing Agreements (APAs), Advance Thin Capitalisation Agreements (ATCAs) and transfer pricing Mutual Agreement Procedure (MAP) cases.

• Transfer pricing yield for 2022/23 was £1,635m, a decrease from the previous year's £2,162m, but consistent with figures since 2015/16 except for the exceptional year of 2020/2021 in which £2,162m was collected.

A key consideration for MNEs to manage the risk of transfer pricing investigations is obtaining certainty upfront through Advance Pricing Agreements (APAs) or Advance Thin Capitalisation Agreements (ATCAs). The number of APA applications made during the year has reached a record high in 2022/2023 since the data was published by HMRC. However, the number of APAs agreed have fallen and the average time to reach agreement is still close to 4 years. The increased appetite for certainty and the longer period to agree APAs could be the product of increasingly complex business models and transactional arrangements of MNEs, as well as more in-depth and quality of analysis required by HMRC requiring more time and resource from the taxpayer and HMRC to agree the application of the transfer pricing rules to such fact patterns.

• Advance Pricing Agreements (APAs) concluded by HMRC in 2022/23 halved compared to 2018/19, with 15 APAs agreed upon and an average negotiation time of 45.5 months.
• The number of Advance Thin Capitalisation Agreements (ATCAs) fell dramatically to 5 in 2022/23, a continuing downward trend following the introduction of corporate interest restriction rules in April 2017.

HMRC released updated guidance on the use of APAs during 2022/23, which indicates that HMRC will not use them to settle existing disputes or where enquiries are ongoing. For further information, see our Insights article. This further impacts how MNEs may seek the APA route to obtain certainty and their options in the context of an enquiry.

HMRC also reported figures on Mutual Agreement Procedure (MAP) cases relating to transfer pricing and permanent establishment issues. The number of MAP cases has doubled since 2020/2021, which suggests there is a significant increase in cases where MNEs are seeking relief from double taxation. The statistics suggest it is around 40% quicker (with respect to the number of months) to resolve a MAP case compared to an APA however, these figures cannot be compared as they are not "like for like" i.e. the MAP figures do not take into account the time spent for the tax audit by HMRC or by the tax authority in the counterparty jurisdiction before MAP application is even made.

• MAP cases settled remained stable at 131 in 2022/23 compared to the previous year, but the time to settle increased to 28.4 months, the second longest in the period covered by the statistics.

HMRC's statistics on the Diverted Profits Tax (DPT) and Profit Diversion Compliance Facility (PDCF) show a focus on resolving ongoing cases with a limited issuance of new notices or "nudge letters" compared to prior years. PDCF cases have taken an average of 20 months to resolve since the start of the programme in 2019 which is just over half the time taken to resolve transfer pricing enquiry cases. This is a further selling point from HMRC's perspective in addition to the fact 97% of taxpayers had their final proposal accepted by HMRC.

• The Profit Diversion Compliance Facility (PDCF) saw a reduction in activity for 2022/23, with HMRC issuing only 2 letters and registering 3 new cases. However, this is unlikely to suggest HMRC are reducing their activity in respect of PDCF and instead there may be a resurgence of "nudge letters" in the following period.
• About two-thirds of businesses targeted with PDCF letters opted to use the facility, while most of those who did not register were investigated by HMRC.
• Diverted Profits Tax (DPT) notices and collections decreased significantly in 2022/23, with 14 preliminary notices and 11 charging notices issued, and a net collection of £40m, compared to £198m in the previous year.
• From April 2015 to March 2023, HMRC has settled over 200 investigations for additional corporation tax of over £4.45bn and business restructuring (as a result of investigations or the introduction of DPT) has led to additional VAT of over £2.6bn.

HMRC's report continues to stress the importance of their pursuit of changing MNEs' behaviours and that challenging arrangements that do not allocate the right amount of profits (the arm's length amount) to the UK is generating significant additional tax revenue. HMRC is currently reviewing around 90 MNE cases with £2.6bn tax under consideration and is litigating various disputes where businesses have not agreed to adjust their tax arrangements.

Comments

To successfully navigate this challenging landscape, proactivity and consistency in identifying, managing and addressing areas of the business subject to tax scrutiny will be critical for MNEs. Dispute resolution needs to be front of mind when managing transfer pricing risk across the lifecycle; from developing an integrated TP strategy, designing sustainable transfer pricing models, preparing supporting documents, to regular review and monitoring.