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HMRC using DPT to boost transfer pricing enquiries

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The amount of ‘tax under consideration’ as part of transfer pricing investigations by HMRC’s large business directorate rose to £5.8bn in 2016/17, an increase of 51% over the previous year, according to laws firm Pinsent Masons, which believes HMRC is using enquiries into diverted profits tax to revisit transfer pricing positions.

Diverted profits tax (DPT) was introduced in April 2015 and, according to Ian Hyde, partner at Pinsent Masons, ‘is being applied much more widely than was anticipated’. Companies have only 30 days to make representations against preliminary DPT charging notices. Once HMRC issues a formal charging notice, the company must pay the tax demanded within 30 days. Hyde believes we are likely to see ‘a flurry of DPT notices being issued over the next few months’, as the two-year time limit approaches for HMRC to issue DPT notices to companies with a 31 December accounting year end.

‘Businesses may have thought they had cleared the tax position by obtaining an APA on the transfer pricing issues, but now that DPT is available that may not be the case’, Ian Hyde commented. ‘HMRC is using DPT to get a second bite of the cherry’, he added.

Speaking on global tax policy at the annual conference of the Tax Executives Institute in Toronto in October, Mike Williams, director of business and international tax at HM Treasury, supported the idea that countries will continue to explore multilateral measures, while also taking unilateral action when necessary, such as the patent box and DPT in the UK.

In similar vein, Jefferson VanderWolk, head of the OECD’s tax treaty, transfer pricing, and financial transactions division, accepted the reality of individual countries adopting interim measures, particularly in the context of the digital economy. ‘We are sensitive to the political pressures and are currently looking at the long-term, permanent approach that would be consistent with existing standards of treaties and transfer pricing, as well as potential interim measures’, VanderWolk said.