HMRC already has one of the best organised and most efficient transfer pricing capabilities of any revenue authority in the world and is often asked to advise other revenue authorities on how they should approach transfer pricing. The additional investment in HMRC resources announced in the Autumn Statement today signals that HMRC is about to get even stronger. Should multinational corporations expect an increase in transfer pricing enquiries and adjustments as a consequence ?
The answer is YES and here are three reasons why:
- Government needs the revenue
George Osborne restated earlier today in his Autumn Statement that the UK government is investing a further £77 million in HMRC to increase revenues raised from tackling tax avoidance. Unfortunately in the court of public opinion transfer pricing is currently perceived as being abused for tax avoidance purposes. As I argued in an earlier blog, this perception needs to change but until then we must accept that transfer pricing is a key area for HMRC to target extra revenue and in the process be seen to be more effectively tackling an important public concern. The UK government aims to raise an additional £22 billion a year in revenue collected by HMRC by 2015 and a large part of this will relate to HMRC resources allocated for transfer pricing.
- Government is not just investing in people, it is investing in software
Government actually expects HMRC to cut back on some staff numbers as they seek to cap tax administration at the £250 million mark. The counter argument for additional staff at HMRC is not new; what is new is that the Autumn Statement makes specific provision for investment in what it terms ‘risking software’. This is software that will increase HMRC’s ability to make use of third party data in assessing which taxpayers are more likely to be using transfer pricing as an avoidance tool. If successfully implemented this will mean that HMRC’s risk assessment process will be quicker and more targeted with the result that not only will we see more enquiries, but these enquiries will be more detailed and much more focussed. Many multinational corporations that have not adequately prepared their transfer pricing documentation may soon find themselves on the back foot in a fast paced and challenging enquiry with a high likelihood of HMRC requiring significant adjustments.
- HMRC is sharing information with other tax authorities on an unprecedented scale
George Osborne made specific mention of information exchange agreements between the UK and Switzerland as well as between the UK and the US in his statement today. However Tax Information Exchange Agreements “TIEAs” (and there are many more in the pipeline including the UK-Brazil TIEA which was signed earlier this year but is not yet in force) do not even begin to tell the story of HMRC’s potential reach in terms of international information gathering. HMRC can rely on information exchange provisions in Double Tax Agreements as well as established international protocols such as the joint Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters as well as a number of Europe wide Directives and Regulations. HMRC also has extended reach through the work of the almost shadowy joint task force that is known as the Joint International Tax Shelter Information Centre or “JITSIC” whose members include the UK, Australia, Canada, China, Japan, South Korea, USA and soon France and Germany.
If ever there was a time to buckle up and get your transfer pricing matters in order, it is now. The corporate tax headlines from today’s statement will undoubtedly be dominated by the very attractive “carrot” that is the UK’s shiny, new, reduced corporate tax rate from 2014. But beware, the statement delivered some “sticks” too. Almost unnoticed, HMRC is investing even more in greater information technology and capability on transfer pricing matters, so buckle up!