The net yield from the UK’s diverted profits tax (DPT) since it was introduced in April 2015, is £386m according to the latest statistics published by HMRC, way in excess of the £270m-£360m it was forecast to bring in up to and including 2019/20. The primary aim of DPT was not to raise funds from the tax itself (although that is obviously a welcome addition to the coffers), but was to encourage companies to change their profit shifting behaviour (including in many cases the restructuring of businesses to ensure a UK taxable presence) and to settle transfer pricing disputes. The rate of DPT is 25%, whereas the rate of corporation tax is 19%, so you can see why companies would prefer to pay corporation tax!
So let’s have a look at HMRC's assessment of the effect that DPT has had on transfer pricing disputes, corporation tax and VAT. And how has the mutual agreement procedure (MAP) for resolving double taxation disputes been working?
The transfer pricing yield has unsurprisingly been much greater since the introduction of DPT. Since 2016/2017, the transfer pricing yield has exceeded £1bn per year. It was £1,454m in 2019/20, compared to £707m in 2014/2015 before DPT had been introduced.
The DPT yield peaked in 2017/18 at 219m and was just £17m in 2019/20 (in part this is due to a change in the way additional corporation tax arising from transfer pricing enquiries that was estimated to result from behavioural change relating to DPT is recorded: in 2017/18 it was included in DPT yield whereas for the last 2 years it has been included in transfer pricing yield).
As expected, DPT receipts are starting to fall away and the statistics support HMRC's view that DPT is working effectively as an incentive for business to cooperate with HMRC investigations and to settle their transfer pricing disputes ("DPT has helped HMRC to settle over 80 investigations for additional Corporation Tax") and/or change their transfer pricing policies. The profit diversion compliance facility introduced in 2019 has been key to enabling large businesses to bring their tax affairs up to date quickly and efficiently.
The fall in DPT receipts is more than compensated for by the increase in corporation tax receipts and VAT. Additional VAT receipts up to 31 March 2020 as a result of businesses restructuring are £2.6bn. The stick of DPT helped settle existing investigations resulting in around £3bn in corporation tax being paid.
According to the information made available by HMRC, "HMRC is currently carrying out around 100 investigations into multinationals with arrangements to divert profits" with a total amount of tax under consideration measuring £5.3bn at the end of March 2020.
OECD MAP Awards 2019
They don’t grab the headlines quite like the BAFTAs but HMRC must be proud of its positioning in the recently published OECD MAP Awards 2019. The UK (together with Japan) won the award for the shortest time in closing transfer pricing cases (approximately 21 months). The UK also won for non-transfer pricing cases (approximately 6 months to close).
The OECD is consulting on what works well in the MAP process and what can be improved. Comments are requested by 18 December. There will then be a public consultation meeting in early 2021. This is good news for taxpayers because MAP is expected to increase due to the increased transparency of cross-border transactions and the increasingly multilateral approach of tax authorities. The economic impact of COVID also makes it more likely that disputes involving other tax authorities will end up in MAP.