HMRC fines targeting multinational enterprises’ (MNEs) transfer pricing have increased tenfold in the last two years, according to Freedom of Information (FOI) data obtained by LCN Legal.

For MNEs, transfer pricing agreements stipulate what one company charges another for a transaction. While these agreements are required for intercountry agreements, MNEs can carry a higher risk of potential tax loss.

Paul Sutton, partner at LCN Legal, said: “Transfer pricing remains an area of growing focus not just for HMRC but for tax authorities around the world.

“HMRC has scaled up its capabilities in this area and is devoting more resources to scrutinising the transfer pricing arrangements of multinational businesses.”

According to LCN Legal’s report, MNEs received £413,437 in fines in 2018/19 – a nine-fold increase from the £45,600 imposed in 2015/16 – from HMRC’s increased scrutiny.

However, LCN Legal notes that HMRC would rather reach a settlement than impose a penalty. By challenging transfer pricing arrangements, HMRC grew its tax haul from £504m in 2012/13 to £1.6bn in 2017/18.

Country by Country

To avoid additional taxation, MNEs are required to share their global income, profit, tax and economic activity information through Country by Country reporting. This increases transparency for companies and regulatory bodies like HMRC, limiting the need for investigations.

However, Country by Country reporting only came into effect in 2017, and Sutton believes the initial December 2017 deadline is a cause of the sharp jump in HMRC fines.

“It is likely that some multinationals had not adequately managed the risks associated with the introduction of Country by Country reporting and had failed to plan for the greater transparency their transfer pricing arrangements would be subjected to,” Sutton said.

According to gov.uk, this reporting structure is only obligatory for roughly 300 UK-headed MNEs, with an additional 200 non-UK headed MNEs affected for at least a year.

While those businesses required to submit to Country by Country reporting are at an increased risk of fines, HMRC recently changed its model to catch potential problems before they progress.

Adjusting the system

In January 2019, the Profit Diversion Compliance Facility was launched to help MNEs declare their arrangements accurately and bring their tax affairs up to date.

“HMRC has scaled up its capabilities in this area and is devoting more resources to scrutinising the transfer pricing arrangements of multinational businesses,” Sutton said. “It wants to work with multinationals to put their tax affairs in order and is generally reluctant to impose fines.

“The increase in fines does suggest, however, that HMRC is increasingly prepared to use the stick in as well as the carrot.”

Sutton recommends that MNEs safeguard themselves with intercompany agreements, protecting against audits and challenges from both HMRC and other tax administrations.

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