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International tax and transfer pricing update

Due to the coronavirus pandemic and the recent agreement reached regarding the UK’s future relationship with the EU, finance teams of international businesses are currently very busy. This article provides details of some important recent developments that should be at the top of the list.

Transfer pricing enquiries

HMRC has recently sent out another round of “nudge” letters in relation to transfer pricing, asking some UK businesses of multinational enterprises to review their transfer pricing arrangements and consider whether appropriate profits have been attributed the UK in relation to the value created, or whether profits have been diverted away from the UK.    

This is the latest in a series of letters that HMRC have issued as part of its profit diversion compliance facility (“PDCF”) initiative.

HMRC launched the PDCF in January 2019 to tackle the perceived continued diversion of profits away from the UK by multinational businesses, using particular operational structures and/or aggressive transfer pricing policies.

The letters received by businesses request for them to disclose their transfer pricing and thin capitalisation arrangements to HMRC within 90 days. Failure to do so may mean that the company faces investigation, which could of course lead to tougher penalties if extra tax is found to be payable.

These letters should not be ignored and any business in receipt of such a letter should carefully consider its response and the possible advantages of using the PDCF. Clearly, it may be beneficial to achieve certainty of tax treatment, both for historical and future positions.

HMRC is clearly keen to use the PDCF to pursue transfer pricing and thin capitalisation enquiries, as recent statistics published by HMRC show that the yield from enquiries related to such matters was £1.454bn in the year to 31 March 2020, an increase of £285m on the previous year.

Transfer pricing documentation

Following the Chancellor’s Budget and Tax Day 2021, the Government has published a new consultation on the current transfer pricing documentation requirements.

The driving force behind this consultation is to ensure that the existing UK requirements remain fit for purpose and best serve the needs of HMRC and UK businesses. International tax progresses rapidly and it has now been over 5 years since the introduction of the Country by Country (“CbC”) reporting regime.

The consultation seeks views on many issues (there are 18 specific consultation questions raised), which broadly cover the following points:

  • A mandatory requirement for companies within CbC reporting groups to provide HMRC with a copy of the master file upon request and to keep (and produce on request) a local file
  • The requirement for additional supporting evidence logs for local files
  • Various administration issues around timescale for creation of files, appropriate metrics to determine any de minimis thresholds
  • The suitability of existing systems to provide transfer pricing data, use of International Dealings Schedules (“IDS”) to report transactional data to HMRC in a structured format
  • Any other general feedback and observations—in particular feedback based on experiences from other jurisdictions

The consultation runs until 1 June 2021. There are no fixed “next steps” after this; HMRC is merely committing to then reflect on the responses received to determine if there are sufficient grounds to consider updating our current transfer pricing documentation requirements.

Withholding tax after the EU withdrawal transition period

In addition to reviewing transfer pricing documentation, UK businesses should also review the withholding taxes position on payments from EU member states, following the end of the transition period on 31 December 2020.  

The withholding tax treatment of all interest, royalty and dividend payments from EU member states to the UK now depends on local law and the relevant bilateral double tax treaty with the UK. Conversely, the UK legislation implementing the EU Interest and Royalties Directive into UK law remains in force, so UK businesses making interest and royalty payments to associated companies in EU member states should not be adversely affected following the end of the transition period.

Additionally, there is no withholding tax on dividends under UK domestic law. If that rule is repealed from UK law then further consideration would be needed.

For more information or further advice, please contact a member of our international tax team on 01903 234094.