What Swiss MNEs should consider under the new UK Profit Diversion Compliance Facility? - Tax and Legal blog

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On 10 January 2019, the UK tax authorities, HM Revenue & Customs (HMRC) launched a new Profit Diversion Compliance Facility (PDCF) for multinational enterprises (MNEs) using cross-border arrangements targeted by Diverted Profits Tax (DPT). DPT was introduced in April 2015 to tackle the diversion of profits from the UK to low tax jurisdictions.

The PDCF gives MNEs the opportunity to review the design and implementation of their transfer pricing policies, analyse DPT and any other tax risks and, if necessary, bring their tax position up to date by submitting a disclosure report with a proposal to pay any additional tax, interest and potentially penalties due.

HMRC has identified a list of several hundred high-risk taxpayers that it intends to investigate. Accompanying the launch of the PDCF, HMRC issued letters to some taxpayers on the list, highlighting the availability of the PDCF. Failure to respond appropriately to these letters is likely to result in an investigation.

Swiss principals, Swiss intellectual property (IP) owners and, generally, structures that result in entrepreneurial profits being allocated to Switzerland, where there is a link to UK sales or activities are among those within the scope of this new facility.

Who may register for the PDCF?

The PDCF principally is designed for MNEs with cross-border arrangements that present a risk of diverting profits from the UK. These arrangements typically involve entrepreneurial or residual profits accruing in a jurisdiction with a lower tax rate than the UK, with some link to UK sales or activity.

HMRC introduced DPT in April 2015 to target such arrangements and have increased the number of DPT and transfer pricing audits into such arrangements. The introduction of the PDCF represents another escalation in HMRC’s approach to arrangements they perceive as diverting profits out of the UK.

HMRC has set out wide-ranging risk indicators of profit diversion (summarised below). As a result, it will become hard for MNEs with a UK presence to ignore HMRC’s guidance and not review their transfer pricing policy.

profit diversion_Deloitte Tax

How does the PDCF work, and what should be reported?

A fast-track process is guaranteed for MNEs that decide to register for the PDCF, and a taxpayer’s proposal may be accepted within three months after the submission of the disclosure report. The following diagram illustrates the process:

Deloitte_Tax blog_PDCF process

The disclosure report must adhere to the specific format prescribed by HMRC. The taxpayer must provide a full and complete disclosure of the relevant facts, and the report must be signed by an appropriate officer of the company. This will be a significant exercise and will need to reference supporting evidence, including a review of emails and interviews with relevant employees, customers and/or suppliers in the UK and abroad. The PDCF report should analyse any relevant tax risks including transfer pricing, DPT, permanent establishment and withholding tax and must make a proposal to settle any outstanding liabilities, including interest and penalties, where appropriate.

Guidance on the PDCF is available from the HMRC website.

What are the main benefits?

The main benefits of the PDCF for MNEs include:

  • The ability to accelerate the resolution of uncertain tax issues and take control of the investigation – Although the preparation of the report requires significant effort, HMRC expects to be able to accept most proposals;
  • Potential to reduce penalties – The disclosure will be treated as unprompted and, therefore, potentially will reduce penalties for inaccuracies in returns or companies’ failure to notify HMRC that the company is potentially within the scope of the DPT, provided certain conditions are fulfilled; and
  • Increased certainty for future years – The acceptance of the proposal by HMRC will provide low-risk status going forward where the facts remain unchanged.

How should Swiss MNEs respond?

HMRC have compiled a list of businesses with arrangements that exhibit the risk indicators that HMRC consider present a high risk of diverted profits. In light of a generally more favourable tax regime in Switzerland, arrangements between Swiss and UK entities are likely to concern HMRC and to be listed.

HMRC are sending letters to some of the businesses on this list, asking these businesses how confident they are that DPT does not apply to them. Those businesses that receive a letter are told that if they do not register to use the DPCF within 90 days, HMRC may consider starting an investigation.

It is a matter of when not if that HMRC will ask questions for businesses that have structures or arrangements targeted by HMRC. HMRC may start asking questions before they send a letter to HMRC inviting them to register for the DPCF.

It is more important than ever for potentially impacted groups to have a clear analysis and support, at a level of factual detail perhaps greater than previously undertaken, if they consider their arrangements are outside of the scope of DPT, their arrangements are arm’s length and they have no requirement to register for the DPCF.

Furthermore, there is a requirement to notify for DPT if a business is potentially liable for DPT and the notification deadline for the year ended 31 December 2018 is 31 March 2019.

Urgent actions are therefore required. Amongst others, Swiss MNEs with arrangements with UK-related entities should not underestimate the potential risk and cost to the business of not undertaking a proper initial risk assessment and determine whether a disclosure under the PDCF may be appropriate.

By Elena Luzi and Jamie Bedford Transfer Pricing  

If you would like to discuss more on this topic, please do reach out to one of the key contacts below.

 

Sponsoring Partners

Shaun Austin - Partner, Transfer Pricing

Shaun has 20 years’ experience in transfer pricing and is the European Transfer Pricing leader. He has extensive experience in advising a broad range of clients in all areas of transfer pricing including planning, documentation, audit defence and MAP and debt pricing. Euromoney guide recognised him as one of the world’s leading Transfer Pricing advisors. He studied at Cambridge University and is a member of Institute of Chartered Accountants in England & Wales (ACA).

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Salim Damji - Partner, Transfer Pricing

Salim is a Tax Partner with more than 20 years of experience in transfer pricing and business model optimisation. He has worked in a variety of countries including the UK, Switzerland, and the US. Salim has worked with a number of multi-national groups assisting them in their transfer pricing audits, documentation, and planning issues. He has experience in the retail and consumer products, pharmaceuticals industry, financial services, and commodity trading sectors. Salim’s main focus over the past few years has been intellectual property planning, business restructuring, and APAs. Salim has been continuously named as one of the world’s leading transfer pricing advisors since 2005 in different journals.

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Daniel Stutzmann - Partner, International Tax

Daniel has more than 10 years of experience in the field of international tax structuring. He specializes in business optimization and cross-border tax planning, including the establishment of Swiss trading and principal/headquarter operations of multinationals.

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Key contacts

Jamie Bedford - Associate Director, Transfer Pricing and International Tax

Jamie is an Associate Director in Cardiff, specialising in transfer pricing, Diverted Profits Tax (“DPT”) and international tax. He is a fully trained HM Revenue and Customs (“HMRC”) Inspector, having worked in HMRC’s Large Business Office for over a decade before joining Deloitte in June 2015. Jamie has extensive experience running HMRC corporate tax enquiries on large businesses, covering a wide range of domestic, international and transfer pricing tax risks. Jamie was also a member of the HMRC DPT team and was involved in designing and implementing HMRC’s operational strategy for engaging with taxpayers on DPT. Jamie is leading Deloitte’s response to HMRC’s Diverted Profits Compliance Facility and has helped many clients analyse their potential DPT exposure, consider notification and decide and execute strategies for engaging with HMRC, in addition to providing advice on the associated transfer pricing and other international tax risks.

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George Galumov - Director, Transfer Pricing

George has more than 10 years of transfer pricing experience covering tax and transfer pricing aspects of various intra-group transactions, including business model and transaction flow design, M&A activity, as well as more mainstream transfer pricing documentation and planning engagements. George has worked with a number of leading multinational corporations including FTSE 100 companies, leading energy and resources businesses, financial services institutions and private equity owned businesses. George has an MSc in Energy Trade and Finance from Cass Business School and is a holder of the Chartered Financial Analyst (CFA) designation.

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Elena Luzi - Manager, Transfer Pricing

Elena is a Manager within the transfer pricing team of Deloitte in Switzerland. She has almost 10 years of dedicated transfer pricing experience and she has worked in a number of different jurisdictions, including the UK, Switzerland, and Italy. Elena has been involved in a variety of projects for leading multinational corporations including designing, documenting, implementing and defending transfer pricing policies. She specialises in business model optimisation, reviewing and updating transfer-pricing models in light of BEPS Actions 8 to 10 focusing on value chain analysis, intangible property and the application of profit splits in intra-group transactions. In all the jurisdictions she has worked, Elena’s clients have included several MNEs in the financial services and commodity trading industries. Elena has a first-class honours Master of Science (MSc) in Economics and Business Law at Universita’ Cattolica del Sacro Cuore (Italy) and is a holder of the ACA designation.

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