Profit Diversion Compliance Facility (PDCF) Published by HMRC January 2019

HMRC Profit Diversion Compliance Facility

 

Chapter 1 – introduction

1.1 Background

Companies should recognise and pay tax on profits where the economic activities to generate those profits are carried out.

HMRC has found that some Multinational Enterprises (MNEs) have adopted cross border pricing arrangements which are based on an incorrect fact pattern and/or are not consistent with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines (TPG), as clarified through Actions Points 8-10 of the OECD Base Erosion and Profit Shifting Project. This is for 2 main reasons:

Firstly, some have made incorrect assumptions, or not implemented arrangements as originally intended or declared to HMRC, so that there is a divergence between the fact pattern on which the Transfer Pricing (TP) analysis is based, and what is actually happening on the ground. This could be for a variety of reasons, including:

  • insufficient understanding or incorrect/misleading statements on the nature or relative value of functions, assets and risks at the outset
  • businesses change over time so that the functional profile may become different from that originally assumed or intended
  • some businesses undervalue the contributions made by staff in the UK and overvalue the contributions of staff in other tax jurisdictions

Secondly, the TP policies are not in accordance with the OECD TPG, for example because of:

  • over reliance on TP policies predicated on contractual assumption of risk and legal ownership of assets, giving insufficient weight to the location of the control functions and/or the contributions to those control functions in relation to the risk and/or the important functions in relation to the assets
  • too heavy a reliance on inappropriate comparables

These arrangements often result in a reduction of UK profits, and may involve the diversion of UK profits to an overseas entity where the profits are taxed at lower rates or not at all. In a high proportion of investigations into such arrangements HMRC is finding that the arrangements don’t stand up to scrutiny and significant additional tax is due.

The Diverted Profits Tax (DPT) was introduced to encourage MNEs using such arrangements to change their behaviour and pay Corporation Tax on profits in line with economic activity. Many MNEs with arrangements targeted by DPT have changed their TP policy and/or business structure leading to the right amount of UK Corporation Tax being paid, eliminating any potential DPT.

1.2 Co-operative Compliance

HMRC prefers MNEs to fully disclose significant tax uncertainties or inaccuracies and to ensure compliance with tax law, and will work co-operatively, proactively and transparently with MNEs to resolve any tax uncertainties and risks.

1.3 Profit Diversion Compliance Facility

HMRC is introducing a new Profit Diversion Compliance Facility for MNEs using arrangements targeted by DPT to give them the opportunity to bring their UK tax affairs up to date.

HMRC recognises that many MNEs operate TP policies to achieve compliance with the OECD TPG, regularly review and update their policies, and discuss them with HMRC during business risk reviews and at other times. If a MNE is confident that their transfer pricing is up to date and they are paying the right amount of Corporation Tax, then they should not use the new compliance facility.

The new facility is designed to encourage MNEs with arrangements that might fall within its scope to review both the design and implementation of their TP policies, change them if appropriate, and use the facility to put forward a report with proposals to pay any additional tax, interest and where applicable, penalties due. This will:

  • enable MNEs to bring their tax affairs up to date openly, efficiently and without investigation by HMRC if a full and accurate disclosure is made
  • give them certainty for the past and a low risk outcome for profit diversion in the future
  • provide an accelerated process, HMRC will aim to respond to the proposal within 3 months of submission
  • allow the MNE to manage its own internal processes around what evidence to gather, who is interviewed, what comparables are used (if any), and how the analysis is presented
  • give unprompted penalty treatment if HMRC has not already started an investigation into profit diversion, 31 December 2019 is an important deadline for registration for some MNEs (see section 3 of chapter 4 of this guidance)

This guidance sets out what HMRC would expect to see in such a report. The review of the arrangements should be proportionate to the scale and complexity of the business, the extent of tax at risk, the cause of any inaccuracies and failures to notify, and the proposals. The report should be free standing and self-explanatory.

While it will be the responsibility of the MNE to review its arrangements and make a disclosure, HMRC is prepared to meet with MNEs who register to use the facility at the outset of the process to discuss plans for the review and later again before the final report and proposal is submitted, so that the MNE can present its findings and conclusions and hear any comments from HMRC.

This work will be a priority for HMRC and a specifically designated, experienced team of specialists will risk assess all reports when received and consider whether the facts described and conclusions reached are soundly based on appropriate evidence, and if the TP policy and methodology adopted is reasonable and consistent with the OECD TPG.

HMRC expects to be able to accept most proposals if they take account of this guidance and reflect the principles in it.

Even if HMRC cannot accept the proposals as first presented, the report should provide a good basis for quick and efficient resolution, through dialogue, of particular differences of view between HMRC and the MNE.

While the facility is aimed at arrangements targeted by DPT, businesses do not need to provide a technical analysis of whether DPT applies if they consider that their proposals eliminate any profit potentially chargeable to DPT. All technical analysis and any payment made can be on a without prejudice basis. HMRC will not regard the making of a proposal as indicating that the MNE thinks DPT could, or should, apply.

1.4 HMRC investigations

Tackling profit diversion is a priority for HMRC. HMRC is conducting extensive research and data analysis and has invested in new teams of investigators. Investigations into profit diversion are usually resolved by agreeing transfer pricing adjustments.

HMRC has identified a number of MNEs in a variety of business sectors which could be diverting profits, and expects to identify more. We are planning a programme of investigation of the arrangements of these MNEs involving HMRC staff in our Large Business and Mid-sized Business directorates, and in appropriate cases our Fraud Investigation Service. If DPT applies, these MNEs face a potential DPT charge and depending on the cause of any inaccuracies or failures to notify, penalties, civil or criminal investigations, as appropriate.

Chapter 2 – how to use the Profit Diversion Compliance Facility

2.1 Who the Facility is for

The Profit Diversion Compliance Facility (‘the Facility’) is aimed at MNEs using, or which have used, arrangements of the sort targeted by the DPT (hereafter ‘Profit Diversion’) – examples of some of these arrangements are in chapter 3 of this guidance and in the DPT guidance. These arrangements typically involve reducing UK profits by under-rewarding UK activity and over-rewarding activity based in an overseas entity where its profits are taxed at lower rates or not taxed at all.

If the MNE is not already under investigation by HMRC in relation to Profit Diversion the Facility gives those MNEs the opportunity to bring their UK tax affairs up to date by:

  • reconsidering their TP policies or restructuring, as appropriate
  • making a full and accurate disclosure of the facts for all relevant accounting periods and using reasonable endeavours to determine the correct amount of tax payable, based on an application of the arm’s length principle to those facts
  • paying what is owed

If HMRC has opened enquiries in relation to matters other than Profit Diversion the Facility will still be available.

If you are already under investigation by HMRC in relation to Profit Diversion and after reading this guidance you wish to work up resolution proposals, please discuss with your Customer Compliance Manager (CCM) or other HMRC contact.

2.2 Accounting periods to be covered

If you use the Facility you must cover all prior accounting periods for the disclosed arrangements to the extent that HMRC is within the relevant time limits to assess (including but not confined to discovery assessments) those periods (‘relevant accounting periods’). This will depend on the behaviour exhibited. There is an example in section 3 of chapter 4 of this guidance that shows these principles.

2.3 Using the Facility and its benefits

If you come forward and register for the Facility you must make a full and accurate disclosure of the facts for all relevant accounting periods, use reasonable endeavours to determine the correct amount of tax payable, based on the application of the arm’s length principle to those facts, pay all outstanding liabilities, and fully co-operate throughout the process. HMRC will then:

  • not start an investigation into potential Corporation Tax, DPT or other liabilities arising from the arrangements during the period HMRC allows you to complete your review and disclosure report (‘Report’)
  • accept the proposal to pay additional tax, interest, and where applicable, penalties due and agree to take no further action with respect to TP or DPT for the periods covered, if HMRC is satisfied that the disclosure is based on appropriate evidence and changes to the TP policy proposed are reasonable and consistent with the arm’s length principle
  • treat the disclosure as ‘unprompted’ for the purposes of considering penalties – the minimum penalty for an ‘unprompted’ disclosure is lower than the minimum penalty for a ‘prompted’ one
  • not charge penalties for inaccuracies in returns or failure to notify for DPT if you have taken reasonable care or you have a reasonable excuse respectively
  • in circumstances shown at section 3 of chapter 4 of this guidance, not charge penalties for inaccuracies in returns or failure to notify for DPT if you have been careless in filing your returns and/or non-deliberately failed to notify for DPT if you register before 31 December 2019 and go on to fully meet the requirements of the Facility
  • treat the timing of your disclosure, for penalties purposes, as when you register to use the Facility
  • where a deliberate inaccuracy is being disclosed, we will not publish details of the relevant corporate entities in line with the Deliberate Defaulters’ Legislation

Making a disclosure using the Facility does not provide automatic immunity from a criminal investigation and HMRC retains sole discretion to apply its published criminal investigation policy in appropriate cases. However, this policy makes it clear that HMRC are highly unlikely to start a criminal investigation for a tax-related offence if you make a full and accurate disclosure.

Where HMRC finds that a report does not include a full and accurate disclosure of all relevant material facts, HMRC will want to understand how this position arose. This will involve a review, which may include colleagues in our Fraud Investigation Service, and may result in their participation in an investigation. Where HMRC believes it has been deliberately misled that may involve a criminal investigation or civil investigation into suspected fraud under the Contractual Disclosure Facility, as described in the Code of Practice 9 booklet.

2.4 Key steps to using the Facility

To make a disclosure:

  1. Establish that you may have tax, interest or penalties to pay.
  2. Register with HMRC.
  3. Submit a Report which includes a proposal to settle any tax, interest and penalties, where applicable, due (‘Proposal’).
  4. Make a full payment of the amounts owed under the proposal on or before the date that your Report is submitted.

2.5 How to register

You can register your intention to disclose by completing the registration form at Annex A to this guidance and emailing it to registration.profitdiversioncompliancefacility@hmrc.gsi.gov.uk.

Sending information by email carries certain risks and HMRC will assume that by sending information by email you understand and accept these risks.

One UK entity can register on behalf of all UK entities involved in the disclosed arrangements.

If you have a CCM please copy them into your email informing us that you wish to register to use the Facility.

At this stage you only need to tell us that you will be making a disclosure. You do not need to give any details of the tax you may owe.

HMRC will normally contact you to acknowledge your registration within 14 days. This will usually involve arranging a meeting known as a Registration Meeting, for you to explain your plans and timetable for completing the Report.

If between registration and submission of the Report there are deadlines for starting an enquiry for an accounting period, HMRC will consider taking appropriate action in respect of the relevant entities covered by the disclosure to protect HMRC’s position.

If you are considering whether to register for the Facility and wish to let HMRC know, you can do so by contacting HMRC at the email address above. HMRC may decide to delay opening an investigation until you decide whether to register.

2.6 Submitting a report

You must submit your Report within 6 months of registration unless HMRC agrees a longer period, and make a payment in line with your Proposal when or before the report is submitted.

One UK entity can submit the Report on behalf of all of the UK entities involved in the disclosed arrangements. However, the declarations signed at the end of the report must cover all of the UK entities involved.

Let your CCM or HMRC contact know if you would like to arrange a meeting to present the work you have done and to explain your conclusions and Proposal (‘Pre-submission Meeting’). You may wish to provide your draft Report before the meeting to inform the discussion. HMRC will explain any immediately apparent concerns it may have, if any, for you to consider.

Do not send the evidence considered with your Report but you must list it in an annex. HMRC may ask to see some or all of it when HMRC reviews the Report to check that your Proposal is underpinned by a factual understanding of the commercial running of the business.

Reports should be in the format described in chapter 4 of this guidance and either be submitted:

  • in an email to: profitdiversioncompliancefacility@hmrc.gsi.gov.uk,
    a maximum file size of 10MB can normally be received in each email sent – copy in your CCM if you have one
  • on an encrypted USB device sent by a courier to:
    Diverted Profits Compliance Facility Team
    3rd Floor
    Sapphire Plaza
    Watlington Street
    Reading
    RG1 4TA

Email details of any required encryption key or code to access the encrypted USB device, specifying the date on which HMRC can expect to receive the USB, to submissions.profitdiversioncompliancefacility@hmrc.gsi.gov.uk, copy in your CCM if you have one.

2.7 Payment arrangements

A requirement of the Facility is that you must pay the amounts disclosed at or before the time of submission. You will be given details of how to pay, including a payment reference number, after you have registered. HMRC’s acceptance of payment will not constitute acceptance of the proposal.

If you cannot pay what you owe immediately you need to agree paying arrangements before submitting your Report by sending an email to: queries.profitdiversioncompliancefacility@hmrc.gsi.gov.uk.

2.8 After HMRC gets your Report

HMRC will normally acknowledge receipt of your Report and payment within 14 days.

HMRC may need to contact you or your authorised tax adviser to clarify points in the Report. Your full co-operation is one of the conditions of using this Facility. Failure to co-operate may result in your removal from the Facility and may increase the amount of any penalties due.

A specifically designated, experienced HMRC team of international tax specialists will consider whether the facts described and conclusions reached in the Report are soundly based on appropriate evidence, and if the TP policy adopted is reasonable and consistent with the OECD TPG.

HMRC will aim to respond to your Proposal within 3 months.

If HMRC decides to accept your Proposal, HMRC will contact you to agree the form of the acceptance.

HMRC will not accept Proposals based on disclosures it considers to be wrong or where there may be tax risks not covered by the proposals, or where the cause of any inaccuracies or failures to notify is not explained. HMRC will discuss its concerns with the business and agree the next steps. This may involve limited work to address those concerns or a more fundamental investigation. If so, the business can decide whether to request repayment of some or all of the money paid. If you are subject to a charge arising on a separate matter HMRC may seek to set off that liability against the amount held under this Facility.

2.9 Form of settlement

If HMRC decides to accept your Proposal, including your conclusions about penalties, it will normally seek to close the relevant accounting periods through HMRC’s statutory powers and will commit to not issuing DPT Preliminary Notices for relevant periods covered by the disclosure.

Where there are no existing Corporation Tax enquiries, HMRC will normally expect businesses to make amendments to Corporation Tax returns in line with their Proposal where the UK entity is still in time to do so. For accounting periods covered by the proposal which are out of time for amendment, HMRC will normally issue discovery assessments where it is in time to do so, which can then be agreed.

Where Corporation Tax enquiries are open for multiple issues, HMRC will normally issue partial closure notices to provide certainty for the matters disclosed.

2.10 Post settlement

In accordance with the guidance at INTM483130, the only way in which a business may be able to gain certainty in relation to future years is through the formal Advance Pricing Agreement (APA) process (INTM422000), if the case is considered to be appropriate for an APA. Outside of this, no guarantee can be given that a future return not covered by the proposal will not be the subject of a transfer pricing enquiry. However, where there has been no significant change in circumstances or conditions a return made on the basis agreed under the proposal is likely to be looked upon as presenting a low tax risk.

You can apply for an APA following HMRC’s acceptance of your Proposal through the Facility if you wish, this should follow normal HMRC procedures as set out in the relevant Statement of Practice.

If you wish to initiate a Mutual Agreement Procedure claim this should follow the normal HMRC procedures.

2.11 HMRC letters

To encourage MNEs to consider registering for the Facility, HMRC may contact businesses if our ongoing risk analysis indicates they have a combination of features commonly associated with Profit Diversion. HMRC will suggest they consider the Facility if they have not already registered and HMRC has not started an investigation. HMRC is not committing to send letters to all businesses identified, and we may decide to investigate without sending a letter. If you receive a letter and do not respond, we may start an investigation.

Businesses should use this guidance to decide whether or not to register for the Facility.

2.12 Offshore property developers legislation

Any disclosures relating to trading in, or development of, UK land or property by non-residents should not be made through this Facility. The Offshore Property Developers Taskforce already deals with disclosures in this area. Where you wish to make a disclosure relating to such arrangements please contact John Ferguson by:

2.13 Help and advice

If you have any questions not covered by this guidance please contact your CCM if you are based in HMRC’s Large Business directorate or, if you are based in HMRC’s Mid-sized Business directorate, you can either:

Chapter 3 – HMRC indicators of Profit Diversion Risk

3.1 About DPT

The DPT came into effect in respect of diverted profits arising on or after 1 April 2015. It is a targeted measure which addresses certain specific arrangements used by MNEs, to erode the tax base in the UK. Its primary aim is to ensure that profits taxed in the UK fully reflect the economic activity here – this is consistent with the aims of the OECD Base Erosion and Profit Shifting project.

Specifically, the DPT addresses 2 basic situations, either a:

  • UK company (or UK Permanent Establishment of a foreign company) using entities or transactions that lack economic substance to exploit tax mismatches
  • person carrying on activity in the UK in connection with supplies by a foreign company which is designed to ensure the foreign company is not trading in the UK though a permanent establishment, and which is designed to secure a tax advantage or tax mismatch

Businesses can mitigate their risk of liability to a DPT charge by not entering into tax driven arrangements, having in place appropriate TP policies applied to the actual business operations and not seeking to artificially avoid a PE in the UK. The UK profits reported for Corporation Tax purposes will then correctly reflect the economic substance of the activity that is undertaken both in the UK and with the UK. This will ensure that the correct profits are subject to Corporation Tax and in the vast majority of cases will eliminate the need for a DPT charge to be raised as there are no diverted profits to charge to DPT.

3.2 Common misconceptions regarding operation of the DPT legislation

References to tax mismatches in this guidance are to be construed as meeting the Effective Tax Mismatch Outcome (ETMO) as defined at S107 FA 2015. Further detail on the ETMO test is at section DPT1180 of the DPT guidance. References to low tax territory or territories are to be interpreted as territories where the ETMO would be met if profits have been diverted from the UK to the territory concerned under the arrangements in question.

During the course of our enquiries into Profit Diversion HMRC has encountered a number of common misconceptions about the operation of the DPT legislation, which have resulted in businesses incorrectly concluding they were outside its scope. These are highlighted below:

  1. Incorrectly restricting the ‘reduction in income’ leg of the ETMO test at S107(3)(a) FA 2015 to scenarios where a reorganisation reduces an existing income stream, when it is wide enough to include scenarios where the arrangements suppress the income below that which would be received under arm’s length conditions from their inception.
  2. Failure to consider fully the extent to which a material provision has been made or imposed between the first and second party when they are not immediate parties to a transaction. This can often result in the Insufficient Economic Substance Condition not being applied by reference to the correct series of transactions or the correct entity that is a party to one or more of the transactions in the series of transactions.
  3. Incorrect application of the Insufficient Economic Substance Condition, particularly the calculation of non-tax benefits, with a lack of focus on the connection between the transaction, transactions, or a person’s involvement and the material provision under consideration. For example, if the material provision relates to the exploitation of intangibles and no significant development, enhancement, maintenance or exploitation functions or control functions of economically significant intangibles are performed by an entity that has legal ownership of such intangibles then the Insufficient Economic Substance Condition may apply even if that entity also has a number of employees performing other low value or unrelated functions.
  4. Inappropriate narrow interpretations of S86(1)(e) FA 15 – whether or not the structuring of activity related to the UK can be reasonably assumed to be designed to ensure that a foreign company is not carrying on a trade in the UK for the purposes of Corporation Tax, will be driven by an assessment of whether the arrangements with respect to that activity can be considered to differ from those which would have existed but for the ability to ensure that result. This will be informed by a rigorous analysis of the facts and commercial drivers behind the structure and will therefore not be dispatched merely through the stating of unsubstantiated assertions by the group or its advisers that it was not designed with this result in mind or that the structure was designed to avoid tax elsewhere.

3.3 Risk indicators of Profit Diversion

The following sections list examples of non-financial structures and transactions (financial structures and transactions in this context refers to those which result in excepted loan relationship outcomes as defined in S109 FA 2015) which HMRC has found to be linked to the use of arrangements which are targeted by the DPT legislation. The examples assume the overseas entities benefit from an ETMO with the UK as defined above. It is not an exhaustive list.

INTM441000 onwards contains further information and examples of TP transactions and structures that HMRC may view as high risk for Profit Diversion.

INTM482040 to INTM482120 gives further examples of TP risk indicators.

3.3.1 General risk indicators

These are:

  • legal contracts between a UK entity and an overseas entity (or entities) which allocate key risks to the overseas entity which are then purported to support a limited or reduced reward for the UK, notwithstanding that functions related to the control of those key risks are performed by the UK – this applies equally where the legal arrangements exist from inception and not as a result of a restructure
  • typical legal arrangements observed where the contractual allocation of key risks may not be consistent with the control of such key risks include:
    • commissionaire structures
    • limited risk distributors
    • toll or contract manufacturing arrangements
    • contract research and development arrangements

The fragmentation within the same UK entity or into different UK entities of valuable integrated functions into standalone functions provided to an overseas entity which are then priced individually as low value-adding functions.

3.3.2 Sales, marketing and distribution risk indicators

These are:

  • important regional (for example Europe or the Europe, Middle East and Africa (EMEA) region) functions based in the UK – for example covering commercial strategy, pricing strategy, or other regional headquarters activities, where the profits due to these functions are routed to an overseas entity in a low tax territory contributing minimal related functionality
  • sales and marketing entities in the UK performing key account management functions – for example market development, negotiating key commercial terms of sales contracts, presale and post-sales support functions, management and control of the sales functions where the profits due to these functions are routed to an overseas entity in a low tax territory contributing minimal related functionality

3.3.3 Supply chain risk indicators

These are:

  • organisation of supply chains where overseas entities in low tax territories become part of the supply chain and the reward to the UK is significantly reduced despite the overseas entity assuming limited functions previously performed by the UK
  • payments by UK entities to overseas procurement or sourcing entities or ‘hubs’ in low tax countries with limited functionality relative to the UK procurement function, or which relate to incidental benefits derived solely due to it being part of a larger MNE group (for example, group synergies or economies of scale)

3.3.4 Research and development (R&D) risk indicators

UK R&D functions described as managing, controlling and performing the development of valuable intangibles in the UK for the purpose of R&D expenditure credit or patent box claims but then described as low value for TP purposes and being rewarded by reference to a modest return on costs.

3.3.5 Intangibles risk indicators

These are:

  • an overseas entity holds legal title to valuable intangibles (for example, valuable intellectual property) and is rewarded by reference to residual profits in relation to those intangibles but either:
    • functions carried out by the overseas entity are unrelated or relatively low value (for example, legal protection or co-ordination activities)
    • a UK entity performs key functions, owns key assets or manages and controls key risks in relation to the intangibles
    • headcount of overseas entity is modest in relation to scope of functions driving value, and in relation to UK entity
    • reward is said to be due to the ‘activities’ of the overseas entity which are largely contracted out to group operating entities including the UK

Specific examples of these types of structures are below, these should not be considered as exhaustive:

  • licensing of intangibles developed by the UK to an overseas entity in a low tax territory where the licensee subsequently engages the UK licensor to perform the functions necessary to the continued development or commercialisation of the intangibles having no or limited capability of its own, while rewarding the UK activity as providing a low value-adding service
  • overseas entities in low tax territories whose functionality is limited to bare legal title to economically valuable intangibles, but are rewarded with the residual profits arising from development activities rather than a risk free return
  • overseas entities in low tax territories whose functionality is limited to financing the development of economically valuable intangibles, but are rewarded with the residual profits arising from development activities rather than a financing return
  • UK entities making direct or indirect payments (for example, by royalties or cost of goods) to overseas entities for access to trade goodwill or incidental benefits derived solely due to it being part of a larger MNE

Chapter 4 – content of the Disclosure Report

This chapter has 6 parts:

4.1 Introduction

Customers who have registered to use the Facility must submit a Report to HMRC. It should be divided into 6 separate sections:

  • a description of the relevant facts referenced to the evidence from which they are derived
  • an analysis of the application of the tax law to the facts and the conclusions reached (can be disclosed on without prejudice basis)
  • an analysis of the behaviours investigated and the conclusions reached on the application of penalty provisions (can be disclosed on without prejudice basis)
  • the proposal being made to settle all outstanding liabilities (can be disclosed on without prejudice basis)
  • a signed declaration by a senior responsible officer within the group on behalf of the entity or entities certifying that to the best of their knowledge and belief it is a full and accurate disclosure of the facts
  • an annex listing the evidence that supports the facts referred to in the report

The responsibility is on the MNE to review and reconsider its provisions and arrangements for all relevant accounting periods including those prior to the introduction of DPT, and to provide a full and accurate disclosure to HMRC.

We would expect the individual signing the declaration to normally be a senior responsible officer within the group who is based in the UK and who is authorised to sign on behalf of the UK entities or UK PEs involved in the disclosed arrangements.

The areas of tax risk to consider will depend on the facts established during the investigation of the arrangements. If during the course of the investigation you identify areas of potential tax loss, you should consider them and make a disclosure of any tax, interest or penalties due.

4.2 Section 1: relevant facts and evidence

4.2.1 What this section should cover

This section should describe the relevant facts established from the evidence listed in the annex. It has been designed to afford HMRC the best opportunity of assessing whether a proposal may be accepted without the need for further investigation by HMRC.

The approach to your investigation of the facts should be determined in the light of the level of tax risk and the nature of the issues being investigated – the investigation should be proportionate to the scale and complexity of the business, the extent of tax and behavioural risk, and the proposal. For example, if the proposal is to provide a cost plus-based reward to highly paid executives based in the UK that are driving the business, we will want to thoroughly understand and potentially probe the evidence and technical analysis that leads to this conclusion.

The relevant facts should reference the evidence from which they are derived. The evidence should be appropriate and reliable. For example, an interview with a tax manager designed to understand the sales activity of a senior sales executive is likely to be far less relevant or useful than an interview with the senior sales executive themselves or one of their sales team.

You should consider:

  • interviewing staff and managers of the business in the UK and abroad, to fully understand their activities
  • interviewing customers or suppliers of the business, where considered necessary, to understand the importance of the customer relationship
  • obtaining relevant contemporaneous communications and documentary evidence (for example, reviewing emails sent and received for or by selected staff)

That evidence should be listed in the order in which it appears in this Report in an annex (‘Annex 1’) but should not be provided with the Report. HMRC may ask to see some or all of it. Annex B to this guidance includes an example of how the evidence might be listed in an Evidence Log in Annex 1 to your Report.

The evidence listed should not be legally privileged. HMRC expects to be able to rely on this evidence in the event of a dispute over the technical analysis. If, exceptionally, you consider that information is privileged, or there are other legal restrictions that you consider do not permit the disclosure of certain facts or underlying evidence, please raise this at your Registration Meeting or Pre-submission Meeting, and make a proposal to offer alternative appropriate evidence.

This section describes matters of fact and should not include assertions or suggested interpretation of such facts. For example, the job title of an individual is a fact. Their duties may be facts established from their job description or contract of employment. The commercial activities they carry out may be facts established from an interview, examination of their emails for a sample period, or discussions with their customers. The extent to which they may be said to exercise control of business risks for TP purposes would be considered an interpretation of the facts and should be discussed in section 2 of this chapter covering the analysis of the application of the law to the facts.

The facts and evidence should provide an impartial and objective description of the arrangements and commercial operations of the business. HMRC may investigate if it considers the facts described to be selective or incomplete, or not derived from complete or appropriate evidence.

Where the facts and evidence differ between accounting periods covered by the disclosure, please specify this where relevant in the Report.

HMRC is aware of agents’ obligations under HMRC’s published standard for agents values and, where relevant, the Professional Conduct in Relation to Taxation principles for members of professional bodies. For clarity, in relation to the Facility it would be helpful for agents to consider those situations where there appears to be insufficient evidence as well as those outlined in the following paragraph.

The agent must take reasonable care and exercise appropriate professional scepticism when making statements or asserting facts on behalf of the customer in the Report. An agent should take care not to be associated with the presentation of facts they know or believe to be incorrect or misleading nor to assert tax positions in the Report which they consider have no sustainable basis. The agent should consider whether they need to make it clear to what extent they are relying on information which has been supplied by the business or a third party.

4.2.2 Abbreviations and glossary

Please set out the terminology used by the businesses for their own products and processes, as terminology may often vary even within the same industry. This includes acronyms for entities, products, geographies and job functions or roles.

4.2.3 Approach to establishing facts

Please include an outline of the sequential steps and the approach taken for establishing the facts and what forms of evidence were gathered (and documented in Annex 1) and by whom.

The exact form of relevant evidence may vary by business, but may include account excerpts, press releases, internal documentation and correspondence such as contracts, system reports or emails, staff or third party interviews, in addition to any other relevant documentation.

4.2.4 Part 1: Foundation facts

There are certain facts (‘Foundation Facts’) and evidence that we consider will be required to be disclosed in every Report in order for HMRC to risk assess those Reports efficiently and consistently. These are described in this section.

We have covered what is required for more complicated arrangements as well as simpler ones, so not all of the detail in the illustrative examples provided will be relevant in every case.

We need to understand:

  • the disclosed arrangements – the nature of the arrangements being disclosed
  • group facts and context – the group’s business, structure and profitability
  • UK entity (or entities) or UK PE’s profit and loss accounts analysed by TP policy – How the TP policies affect the financial performance of the UK entities or UK PEs that are part of the disclosed arrangements
  • staff profile – the staff profile of the UK and overseas entities involved in the disclosed arrangements
  • Relevant overseas entity (or entities) cost and revenue profile by source – the profile of the overseas entities involved in the disclosed arrangements
  • asset ownership – details of asset ownership and background to this, where this is relevant

4.2.4.1 Disclosed arrangements

Please detail the arrangements that you are disclosing (hereafter ‘the Disclosed Arrangements’) for which an adjustment is proposed.

You should include for each of the Disclosed Arrangements the information requested below. A flow chart may be the easiest way to display or summarise it concisely, referencing the sources of evidence used to establish the factual value chain. An example is in Annex C to this guidance.

You do not need to provide the information in a chart format but should cover all of the following in your Report:

  • a description of the disclosed arrangements
  • the filed accounting periods for which you wish to disclose (hereafter ‘the disclosure period’)
  • the legal name and legal form of the UK entity (or entities) or UK PEs for which you wish to make a disclosure
  • the legal name, legal form (for example, SA, CV, LLP), country of incorporation or formation and country of residence of all overseas related parties who are direct or indirect parties to the disclosed arrangements (hereafter collectively the ‘Relevant Overseas Entities’)
  • a description of the contractual or legal title, financial and physical goods/service flows between the UK entity (or entities) or UK PEs and all the Relevant Overseas Entities who are direct or indirect parties to the disclosed arrangements as described above, this should include but not be limited to:
    • relevant contractual arrangements (for example, distribution agreement)
    • TP policy and rate for an entity (for example, Transactional Net Margin Method targeting X% operating margin)
    • quantification of level of intercompany payments or receipts made
    • Tax residence of companies
    • whether any of the companies included has a PE and which country that PE is based in – specify any dealings, financial flows, and physical flows between the PE and the rest of the entity

For the avoidance of doubt, any overseas entities who receive income or assets, or provide payments or assets directly or indirectly from or to the UK entity (or entities) as a result of the Disclosed Arrangements, are to be included as Relevant Overseas Entities.

Please also provide the following financial information, using a consistent accounting standard:

  • global third party sales figures relating to the Disclosed Arrangements split by customer location between UK, the rest of the internal reporting region the UK is part of (for example, Europe or EMEA) and the rest of the world
  • estimated group operating margin relating to the Disclosed Arrangements split by customer location between UK, the rest of the internal reporting region the UK is part of (for example, Europe or EMEA), and the rest of the world

The information above should provide us with an overview of the Disclosed Arrangements within the disclosure period and allow us to efficiently risk assess your proposal.

4.2.4.2 Group facts and context

The information requested in this section should allow us to understand the background to the group’s commercial operations, its legal structure and key group financial performance metrics. This will help us put the Disclosed Arrangements into context with respect to the group overall.

Please provide the following for the disclosure period (unless otherwise stated), it does not need to be longer than a few short paragraphs:

  • very brief history of the group and its origins
  • description of the group’s commercial focus and what products, services, intangible property or other property it sells
  • any further relevant facts about the group that you consider to be helpful in understanding the arrangements that are being disclosed

Please also provide:

  • a link or navigation to where the group’s statutory consolidated financial statements can be accessed by HMRC – if such financial statements are not publicly available, please include within this section an image of the profit and loss account and balance sheet, referencing the source document in Annex 1
  • a group chart showing the group’s legal and ownership structure for the UK entity (or entities) and Relevant Overseas Entities involved in the Disclosed Arrangements using standard notations as at the first accounting period end and last accounting period end within the disclosure period – this should include the country of incorporation and tax residence of each entity listed and highlight any unusual elements such as tax transparent entities, hybrid entities, dual tax resident entities, no tax resident entities or other hybrid or residence anomalies
  • global third party sales figures for the group split by customer location between UK, the rest of the internal reporting region the UK is part of (for example, Europe or EMEA) and the rest of the world
  • global group operating margin for the group split by customer location between UK, the rest of the internal reporting region the UK is part of (for example, Europe or EMEA) and the rest of the world
  • group R&D costs split by location where the costs of R&D activity were originally incurred, as opposed to where those costs may have ultimately flowed within the group (that is, before any intercompany recharges or transactions), detailing UK, the rest of the internal reporting region the UK is part of (for example, Europe or EMEA) and the rest of the world
  • provide a description of important business restructuring transactions, acquisitions and divestitures impacting entities that are relevant to the Disclosed Arrangements

4.2.4.3 UK entity’s (or entities’) or UK PE’s profit and loss accounts analysed by TP policy

The information requested in this section should allow us to understand the effect of the TP policies as filed on the relevant UK entities’ financial performance.

For each relevant UK entity or UK PE that is involved in the Disclosed Arrangements for the accounting periods subject to the disclosure, give a profit and loss account per the originally filed position analysed by TP policy which reconciles materially to the UK statutory accounts. If it is easier to use management accounting data please materially reconcile to the statutory figures at operating profit level.

Where there is more than one business division operating within the same UK entity or UK PE please provide a separate profit and loss account analysis by TP policy for each division.

Where a company has multiple transactions with related parties with differing TP policies, please provide a separate profit and loss column in relation to each provision subject to a different TP policy (including cost contribution arrangements) or different transfer price as filed. Where multiple transactions with the same related party for the same or similar goods and services occur under the same policy and at the same transfer price (for example, purchase of goods with same gross margin), these may be aggregated within a single column.

Each column should clearly show revenues, gross margin, operating expenses, and operating margin associated with that provision by source, and disclose the TP policy originally applied, the transfer price or rate used and the related parties with which the provision takes place.

Where the entity is a party to more than one provision and its costs have been allocated between provisions, please provide a description of the allocation basis used. For example, it may be appropriate for certain common overheads, which cannot be specifically allocated to different provisions, to be allocated across all or some of those provisions.

Where a provision for the same or similar goods or services exist between non-UK entities to which a transfer price has been applied that differs from that paid or received to or by the UK entity (or entities) or UK PEs, please disclose the difference in transfer prices applied and any differentiating fact patterns.

Examples showing the information requested are in Annex D to this guidance to help you.

4.2.4.4 Staff profile

The information requested under this section should enable us to understand the role of staff located in the UK with respect to the Disclosed Arrangements and how they fit into the wider group’s staffing profile in terms of the department they work in and their seniority within the group. This should help us to risk assess your Proposal efficiently for transfer pricing purposes.

We recognise that data systems used to record staff details are not always perfect. We are not looking for pinpoint accuracy. It may not matter, for example, if the headcount was disclosed in the UK as 95 on the group’s HR system when it was in fact 98 due to a system recording error. On the other hand, it may matter to the proposed outcome if you overlook senior executives who were based in the UK during the disclosure period.

For each department or equivalent (for example, sales, marketing, R&D, manufacturing and financing), please describe the functions this department performs within the group. Sources of evidence used to identify all of the entities’ departments and the functions they perform should be referenced in Annex 1. Such evidence should be factual (for example, based on job description or job adverts) and avoid opinion as to the relative importance of each function at this stage.

Please provide the information requested below with respect to the group’s staff as at the first and last accounting period end date within the disclosure period. Please provide the information in whatever format is easiest for the business, for example in a table or organogram or another format:

(a) The group’s staff grading structure. Separate tables or organograms may be required where gradings differ materially by department, an example can be found in Table A of Annex E to this guidance.

(b) The number of staff in each grade, showing the department in which they work, and analysed between each UK and Relevant Overseas Entity (or entities) involved in the Disclosed Arrangements, together with a global total, an example can be found in Table B of Annex E to this guidance.

In our experience, many businesses can provide this information directly from a report generated by their HR system. Please include in your UK figures any expatriate staff based in the UK and staff on secondment to the UK.

(c) Excluding the staffing grades that wholly fall within the bottom 40% of the grades when the overall grades are listed in ascending order of seniority, please provide the job titles of employees of the UK and Relevant Overseas Entities identified as part of the Disclosed Arrangements.

For example:

Number of staffing grades within group: 14
40% of number of staffing grades (40% of 14): 5.6
Rounded down to nearest whole number: 5

So the number of grades starting from lowest grade and working upwards that may be excluded from the job title analysis is 5.

Please also provide the percentage of total remuneration for any staff identified by the above method (if any) that consists of commission or sales quota based variable pay, this should exclude any general performance-related bonus pay and any share-based compensation. This should help us identify those staff that are likely to be more heavily involved in driving sales for the business, as this is sometimes not apparent from job titles.

Where there are a number of employees with the same job title, these may be aggregated by entity and percentage ranges for each job title may be given for the percentage of total remuneration that is commission or sales quota based variable pay. An example can be found in Table C of Annex E to this guidance.

Please include in your UK figures any expatriate staff based in the UK and staff on secondment to the UK, and separately identify such staff.

(d) Where staff, officers or directors of other overseas entities perform roles or duties relevant to the disclosed arrangements please provide details of their job titles, officership or directorship, employing entity and where they perform the roles.

These might include:

  • overseas staff employed other than by the Relevant Overseas Entities that either manage staff based in the UK or have an active role in the UK entity’s activities
  • UK employees that also act in a capacity as a director of a relevant overseas entity (please provide proportion of time spent in each capacity)
  • overseas staff that are the most senior staff in a particular department/function

An example can be found in Table D of Annex E to this guidance.

4.2.4.5 People functions

It is critical that there is a rigorous understanding of the activity carried on by business operations staff identified at point (c) above of the staff profile requested. This understanding should be tested and referenced by way of evidence, for example through staff interviews and/or a review of sample emails. The amount of testing and evidence gathered should be proportionate to the significance of the staff’s roles in generating value.

Any staff interviewed as part of the investigation should be separately listed in Annex 1 of your Report disclosing their job role and grade.

4.2.4.6 Relevant Overseas Entities cost and revenue profile by source

The financial information requested in this section is designed to allow us to understand the extent to which those entities’ revenues and costs derive directly or indirectly from the UK, and to provide context as to the materiality of TP arrangements with the UK.

Please provide, for the Relevant Overseas Entity (or entities) involved in the Disclosed Arrangements the following facts and evidence:

  • a breakdown of revenue and cost that reconciles to the operating profit within the financial statements (audited if relevant) for each of the Relevant Overseas Entities to the Disclosed Arrangements for the disclosure period
  • different types of income stream (for example, sale of goods, royalty income) and types of expenditure (for example, R&D recharges, marketing recharges) should be detailed on separate lines.
  • revenue and expenditure should be split out into separate columns according to source such as:
    • own costs incurred directly (that is, own staff and overheads and third party costs not charged from another group entity)
    • income and costs from UK entities, by entity
    • income and costs from other relevant overseas entities, by entity
    • income and costs recharged from other group rest of the world entities
    • third party income and costs received or borne directly from third parties

An example is in Annex F to this guidance to help you.

4.2.4.7 Asset ownership

If the Disclosed Arrangements involve related party payments for rights to or over assets, please provide the information requested in the Tangible or Intangible Asset subsection of the Other Facts section below.

4.2.5 Part 2: other facts

Other facts covered in this section only need to be considered as required by the tax risk and issues identified as part of your investigation of the Disclosed Arrangements. For example, if it is clear from your investigation of the facts that corporate tax residence is not a risk then the relevant facts regarding this do not need to be covered in the report.

4.2.5.1 Other relevant facts and evidence – specific to TP risk

4.2.5.1.1 UK sales reported by entities outside of the UK

Where some or all sales to UK customers are reported in an entity outside of the UK for example commissionaire or e-commerce hubs, please provide details of the value of those sales for the disclosure period.

Please also provide details of the process for a sale to a UK customer from start to finish. This should include where relevant, but not be limited to, which staff in which countries and entities:

  • perform the initial business development activity to identify ‘sales leads’ and ‘pre-sales’ activities
  • conduct product marketing, advertising or market research
  • are involved in the negotiation of the customer contract terms
  • are involved in approving the sales contract terms
  • sign the sales contract terms
  • provide ongoing customer account and relationship management activity and after-sales service or support

Where the process above varies depending upon the size of customer and between new and existing customers, please specify these differences.

4.2.5.1.2 R&D activity profile

Please provide a description of the stages of product or service development within the group and the management or leadership committees involved in the approval stages, detailing the members and their location.

Please identify the location of the group’s R&D facilities, including those within the UK.

Please detail any claims made by group entities for UK tax relief for research and development expenditure or under the patent box regimes for the disclosure period. This should be referenced to any reports previously submitted to HMRC supporting these claims, to be detailed within Annex 1 to your Report.

4.2.5.1.3 Asset ownership – intangibles

Information in this section is to be provided where the group owns intangibles for which either:

  • the legal owners or their licensees receive income directly or indirectly from affiliates in relation to the use, or right to use those intangibles within the business
  • the legal owners or their licensees receive income directly or indirectly from third parties in relation to the use, or right to use those intangibles

Examples might include patents, trademarks or know-how. It does not matter whether the intangible is recorded as an asset for accounting purposes.

With respect to these intangibles please provide:

  • details of the current legal owner including its tax residency and the number of staff it employs
  • where intangibles ownership is split within the group between more than one legal owner, details of any group policy determining which intangibles owner should own which asset
  • for each intangible (or group of intangibles where many of a similar nature exist) details of:
    • how and when they were acquired (including from whom and the acquisition price) or created by their current owner
    • any intra group charges for use, whether direct or indirect
  • a list of contractual agreements among identified associated enterprises relating to the allocation of risk and reward for these intangibles, including cost contribution agreements, research and development service agreements and licence agreements
  • a summary of which group TP policies described in the response to the ‘Group Facts and Context’ section govern the reward between associated enterprises relating to these intangibles

In providing the facts and evidence above we would expect the business to have reviewed where legal title to intangible property sits. For example, the UK and the European Intellectual Property Offices hold records for ownership of certain types of intangible property (such as patents and trademarks), and we would expect these to have been checked in a proportionate way.

Where intangibles are a key value driver in the business it is necessary to identify the individuals that are involved in performing the development, enhancement, maintenance, protection and exploitation functions relating to the intangibles and how these are performed and where they are performed with reference to evidence. Any other analysis in this area should be provided in section 2 of this chapter, as this will require technical transfer pricing judgement based on the facts of the functions performed.

Where a business unit or division or particular intangibles has or have been sold to a third party within the past 6 years, and that business unit or division or intangibles is or are similar in nature to the business unit or division or intangibles to which the Disclosed Arrangements relate, please disclose details of the sale to the third party, including any valuation for intangibles provided for in the sale.

4.2.5.1.4 Asset ownership – tangible assets

Information in this section is to be provided where the group has tangible assets within the group for which either:

  • the legal owners receive income directly or indirectly from affiliates in relation to the use, or right to use those assets within the business
  • the legal owners generate revenues direct from third parties for the use of, or right to use those assets

Examples might include freehold or leasehold property or plant and equipment.

With respect to these assets please provide:

  • details of the current legal owner, number of employees and tax residency
  • the basis on which the asset owner within the group was or is selected
  • for each asset (or class of asset where many of a similar nature exist) details of:
    • how and when they were acquired (including from whom and the acquisition price) or created by their current owner
    • any intra group charges for use, whether direct or indirect
  • a list of contractual agreements among identified associated enterprises related to the allocation of risk and reward for these assets including cost contribution agreements, service agreements, and fees for use however described
  • a summary of which group TP policies described in the response to the ‘Group Facts and Context’ section govern the reward between associated enterprises relating to these assets

4.2.5.2 Other areas of potential tax risk

When HMRC investigates Profit Diversion we consider in parallel all of the tax risks that are related to the arrangements, including additional tax liabilities for periods before DPT took effect.

The areas of tax risk other than TP and DPT to consider will depend on the facts established from the investigation.

They may include but are not limited to:

  • company residence – where the central management and control or place of effective management of an overseas company may in fact be in the UK
  • UK Permanent Establishment (UK PE) – in addition to a potential avoided permanent establishment for DPT purposes
  • Withholding Tax (WHT) – including as amended by Finance Act 16, that should be deducted from payments that have a UK source
  • Controlled Foreign Companies (CFCs) – where certain low taxed income is earned by overseas entities under the control of UK persons
  • the hybrid and other mismatches rules – these seek to counteract tax advantage arising from the use of hybrid entities, hybrid financial instruments and in certain circumstances permanent establishments that produce a mismatch across different jurisdictions
  • indirect tax risks in relation to the classification, recognition or valuation of transactions, including those made between connected parties

4.2.5.2.1 Relevant facts and evidence – specific to corporate residence risk

Facts reviewed when considering this risk may include:

  • the names and addresses (both commercial and residential) of the disclosed entities’ directors
  • agreements that govern the foundation and conduct of the entity (for example, articles of association and memorandum of association) and any internal governance documents that apply either at entity or group level
  • board minutes including any associated papers provided to board members
  • while central management and control may be exercised through board meetings this is not necessarily so and each case needs to be considered on its own facts – the review should identify and consider:
    • the range of options put to the board and where these were developed
    • the capability of the board members to evaluate these options, and relative to each other, which board members drove decision-making more
    • the amount of time and the amount of information afforded to board members in evaluating the options
    • where board members are UK resident
    • whether the board meetings were actually held outside the UK.
    • review evidence to confirm that decisions are not being taken outside of board meetings (for example, review of board member emails in advance of meetings)
    • whether suggested wording for board minutes were provided prior to the meetings, and if so, by whom and from where

4.2.5.2.2 Relevant facts and evidence – specific to permanent establishment risk

Consideration should be given to how any UK PE arises and any investigation should be tailored to this risk. The establishment of the facts requested in the Foundation Facts section for TP purposes should also assist in considering the UK PE risk. We would expect the following to be covered by any investigation of UK PE risk and disclosed in the Report:

  • the legal name, legal form, country of incorporation and country of residence of the non-UK resident to which your investigation of the PE risk relates
  • disclosure of the total sales made by the non-resident company and the proportion of those sales subject to your investigation of UK PE risk
  • example contracts for sales made to the top 10 UK customers by value, reviewed and listed in Annex 1
  • number of UK staff employed in the UK fixed place of business/UK intermediary company and their roles
  • number of UK staff employed in/by the non-UK resident entity and their roles in relation to sales
  • the functions performed by the UK staff, whether employed by the non-UK resident company or the UK intermediary, where relevant, including the extent of their interactions with UK and/or non-UK customers
  • please include coverage of the following in your investigation of UK PE risk:
    • where sales have to be authorised – a sample of correspondence/records in relation to specific authorisation requests should be reviewed along with an analysis (description and proportion) of the sales requests made by UK staff that have been turned down or materially modified by the person or persons who are authorising the sale
    • where non-UK staff are authorising UK sales please disclose how their seniority compares to any UK staff involved in negotiating sales and requesting those authorisations in terms of their respective staff grades and experience and qualification
    • reviewing evidence to check that the sales process, including any ‘sign off’ procedures, are being followed in practice as described in any policy documentation

4.2.5.2.3 Relevant facts and evidence – specific to WHT risk

Where the Disclosed Arrangements and Proposal relate to a potential WHT obligation which will be applied to a payment from a UK source to a relevant overseas entity, please consider the types of information set out below:

  • all agreements that enable necessary intellectual property owned or licenced in by the group to be used or otherwise accessed by the entity making sales to UK customers
  • where rights are passed to the entity potentially in scope for UK WHT by a number of group entities then the full chain of agreements under which these rights pass should be considered
  • financial statements for all entities identified above for all periods impacted by the commencement of the FA16 WHT rules, including a breakdown between jurisdiction of:
    • sales/turnover
    • payment made for the use of the intellectual property
  • the tax residency of all entities identified above, an explanation of whether the income in question is subject to tax in that territory and the amount of tax actually paid and not reclaimed or otherwise capable of repayment
  • the basis for the calculation that results in the payment for the use of the intellectual property to be made, for example a percentage of sales, percentage of operating expenditure, residual profits
  • for the entity potentially subject to UK WHT an analysis of payments made, including both the amount and date paid

Where, in preparation for making a disclosure, you have considered whether there is a withholding tax charge but concluded that none arises then you should describe the facts and evidence reviewed and this should be referenced to Annex 1.

4.2.5.2.4 Relevant facts and evidence – specific to CFC risk

The facts necessary to consider whether there is a CFC risk will need to be considered by reference to which charging gateways and exemptions within the CFC legislation at Part 9A TIOPA 2010 are in point. For this reason we have not provided a prescriptive list here. However, we would expect Reports to identify any facts on which they have based the CFC analysis, if a CFC risk has been identified, along with listing the underlying evidence for those facts at Annex 1.

4.2.5.2.5 Relevant facts and evidence – specific to hybrid and other mismatches risk

The group’s organisation charts and arrangements should be reviewed and if any relevant risks under the hybrid and other mismatches legislation at Part 6A TIOPA 2010 emerge further facts should be obtained regarding the specific entities concerned.

4.3 Section 2: application of tax law to the facts

The purpose of this section is to set out the detailed tax technical analysis. This should include the reasoning and conclusions with regard to the Disclosed Arrangements, reflecting at every stage the facts and evidence provided in response to the requirements of section 1, as referenced in Annex 1.

All of the tax technical analysis included in this section can be submitted on a without prejudice basis if you wish to do so.

The following tax technical analysis should be provided for each of the tax risks identified, where applicable. This analysis should be proportionate to the tax risk. If it is clear there is no significant tax risk in a particular area then brief comments explaining why this is the case will suffice.

4.3.1 Transfer Pricing – Technical Analysis

4.3.1.1 Introduction

INTM485021 to INTM485140 covers key points in practically preparing comparability analyses for TP purposes.

As described in the OECD TPG at Paragraph 1.33 there are 2 key aspects in performing a comparability analysis:

  1. Accurate delineation of the controlled transaction.
  2. Comparison of the price and conditions of the controlled transaction as accurately delineated with those of a comparable transaction between independent enterprises.

This section of the Report should firstly outline the technical analysis to complete part 1 above, building on the facts disclosed in section 1 of the Report. It should then consider the technical analysis to complete part 2 above. The information provided in this section is distinct from that provided in the facts and evidence section as it requires technical application of TP principles and judgement.

Further detailed guidance on performing parts 1 and 2 is in Section D of Chapter I of the OECD TPG and guidance on 2 is in Chapter II and Chapter III of the OECD TPG.

4.3.1.2 Accurate delineation of the controlled transaction

This section should include a detailed analysis resulting in the accurate delineation of the controlled transactions, in the context of the economically relevant characteristics identified in the guidance contained within Section D of Chapter I of the OECD TPG.

This should include, but not be limited to, a detailed functional analysis, including a control over risk analysis to allocate risks for transfer pricing purposes, and consideration of the relative economic significance of the functions performed, assets used and risks assumed by the parties.

As shown in INTM484020, without a detailed functional analysis referenced to appropriate evidence, any subsequent TP technical analysis is unlikely to be of any value.

In order to perform a rigorous comparability analysis we expect the tax team, and agent where relevant, to speak to a number of suitable commercial staff and corroborate their understanding through reviewing appropriate evidence. For example, they might interview suitable commercial staff and record the information in a note of interview and review appropriate evidence such as: correspondence between key commercial staff, review operational policy manuals, business plans and job adverts. The facts emerging from such a review should be documented in section 1 of chapter 4 of this guidance, but the application of the technical analysis to those facts should be analysed in section 2.

Common issues and behaviours HMRC has observed relating to analysis provided to HMRC seeking to accurately delineate the controlled transaction, and which may impact HMRC’s ability to accept a Proposal include:

  • where labels form the basis of delineation without sufficient regard to actual functions performed, assets used and risk assumed – where the use of labels such as ‘low risk distributor’, ‘routine’ or ‘risk stripped’ within intra group agreements or TP policies to describe, for example, sales and marketing companies, manufacturer distributors or specialised R&D facilities providing value adding functions forms the basis of delineation without regard to actual functions performed, assets used, and risks assumed
  • delineation based upon pricing approaches – where the use of the chosen TP policy is relied upon to determine the risk profile of the entity (resulting in a circular argument that the nature of the reward an entity receives means that it cannot be considered to control any risk) rather than performing a detailed functional analysis to determine the actual functions performed, assets used, and risks assumed, see Paragraph 1.81 of the OECD TPG, which provides further explanation as to why the form of remuneration cannot dictate inappropriate risk allocations
  • limited evaluation of contract versus conduct – significant reliance being placed on the terms of written intra-group contracts to undertake the delineation of the transaction and inform pricing of the transaction without consideration of whether the conduct of the parties to those contracts, identified through a proper functional analysis of the functions performed in the UK to understand the substance of the transaction, differs from the written contractual form
  • insufficient consideration of economically significant – the incomplete identification of economically significant risks pursuant to INTM485023 to INTM485024and limited analysis as to where the capability and actual performance of the control over the relevant risks exists, or whether that risk is economically significant in practice
  • insufficient consideration of control of risk – where analysis of control of risk focuses solely on establishing that some control of risk is held by the party contractually assuming that risk, or limited to identification of the most senior staff exercising control of risk
  • insufficient consideration of contribution to control of risk – where analysis of control of risk does not consider rewarding contributions to that control which may be made by other entities at various stages of the value chain (paragraph 1.105 of the OECD TPG refers)
  • insufficient depth of development, enhancement, maintenance, protection and exploitation analysis when considering economically significant self-developed or acquired intangibles that serve as a platform for future development activities – paragraph 6.56 of the OECD TPG refers to the importance of identifying certain functions and the different layers of control when considering such intangibles: there is often insufficient analysis as to the economic significance of such intangibles and who is performing and contributing to the control functions, which affect the allocation of risk for TP purposes, with respect to such intangibles
  • lack of analysis underpinning the choice of the tested party – linked to many of the common issues and behaviours highlighted above with regard to accurately delineating the transaction, insufficient analysis at that stage often leads to drawing inappropriate conclusions on which party should be chosen as the tested party for a particular transaction, or whether a TP method for which it is necessary to identify a tested party is appropriate
  • use of out of date and inaccurate functional analysis – typically seen where old TP reports are rolled forward without proper review to identify new functions, new comparable entities or significant changes in activities: as shown in INTM484040, the functional analysis should be prepared with substantial input from the people in the business who have day to day experience of operating the relevant functions
  • use of generic or overseas group functional analyses – application of functional analysis conducted for legal entities overseas or generically to the UK entities without determination as to whether UK facts and circumstances are sufficiently comparable

4.3.1.3 Comparison of the price and conditions of the controlled transaction with those of a comparable transaction between independent enterprises

This section should include a detailed analysis resulting in a comparison of the price and conditions of the controlled transaction with those of a comparable transaction between independent enterprises following the guidance contained within Chapter III of the OECD TPG.

This should include, but not be limited to, an explanation as to why a transfer methodology has been chosen and, if a methodology has been chosen that relies on comparables, how those comparables have been identified and selected.

INTM485120 provides further commentary and highlights that where a subset of comparables enhance comparability then the other purported comparables should be rejected. Thorough corroboration of acceptability of final comparables through shareholder analysis and website research will be expected. Additionally, as shown in INTM484090, it is better to have a small number of comparables that are good quality comparables over lots of lower quality comparables.

Where reliable comparables cannot be found, customers are expected to follow the OECD TPG in considering alternative pricing approaches, including use of the transactional profit split methods.

You can use the HMRC guidance on OECD TP methodologies to do this.

Common issues and behaviours we have observed relating to analysis provided to HMRC seeking to identify the most appropriate TP method for transactions and benchmark them using comparable transactions, and which may impact HMRC’s ability to accept a disclosure proposal include:

  • lack of proper consideration of potential internal comparable uncontrolled prices – the importance of considering internal comparable uncontrolled prices is highlighted at INTM485070, if any group entity provides similar goods or services to third parties, key terms of those contractual arrangements, along with the group’s internal cost benefit analysis of negotiating parameters, should be included in the Report together with supporting conclusions as to comparability before other methods are considered
  • external comparable uncontrolled prices used without adjustments for key – comparability analysis relying on external comparable uncontrolled prices should evaluate and demonstrate, in concluding that an uncontrolled transaction is comparable to a controlled transaction, that:
    • none of the differences (if any) could materially affect the price in the open market
    • reasonably accurate adjustments could be made to eliminate the material effects of such differences

INTM485110 provides further commentary on making adjustments to external comparable uncontrolled prices,

  • proposed comparables which have significant functional or risk profile differences compared to the tested transaction – examples frequently seen include:
    • use of wholesalers or logistics distributors to support the return for integrated sales and marketing entities
    • entrepreneurial entities or strategic and high value adding functions compared to low value adding service providers
    • use of interquartile ranges including loss making entities used to price businesses suggested to bear limited risk
    • inclusion of entities with significant functional differences (and lower margins) to determine a purported interquartile range for which the UK’s reward is targeted at the bottom end, where those entities should have been properly rejected as comparables
  • pricing approaches which require the UK to share or bear downside risk while limiting their ability to share in any upside – at arm’s length a UK entity is unlikely to bear costs of risks associated with their trade when their ability to earn a return on this risk is effectively capped (for example through royalty payments or fixed margins)
  • insufficient consideration of elements of the UK entity cost base – where technical analysis as to whether certain types of costs should factor into the calculation of the transfer price appear not to have been considered, or reasoning not explained, examples might include exceptional costs, restructuring costs, amortisation, indirect overheads, trading forex or share based payments, failure to include relevant costs can effectively under-reward the UK for its functions and risks, if comparables are then selected to benchmark the UK reward that do not bear such costs
  • double counting of reward under different provisions – where profit earned by the UK entity under one provision (for example, cost plus for provision of staff to overseas entity) is included within the measurement of the return under another provision (for example, operating profit earned for marketing and distribution activities), thereby incorrectly measuring the return being benchmarked against comparables
  • allocation of cost base to incorrect provision – where for example a UK entity is rewarded under a range of different TP policies and costs that should be subject to a mark-up are allocated to the return on sales calculation for sales and marketing thereby reducing the overall reward to the UK
  • use of commercial royalty databases – as shown in INTM485140, such license agreements may provide general information which might help indicate whether the work being done to try to establish an arm’s length price is reasonable but they will be very unlikely to be sufficiently comparable to a related party license transaction under review
  • inconsistent accounting standards used for tested party and comparables and no comparability adjustment made – benchmarking UK reward to comparable entities reporting under UK GAAP and IFRS comparables but then testing UK profits of the tested party under a different accounting standard
  • use of non-contemporaneous information – reliance upon historic comparable uncontrolled prices or benchmarking data that have not been updated to reflect the period under consideration, or reliance upon comparable uncontrolled prices that have occurred subsequent to the transaction to be priced

To the extent that there is information contained in a transfer pricing Master File or Local File prepared in accordance with Action Point 13 of Base Erosion and Profit Shifting that provides areas of what we have requested in full, the information already prepared can be inserted into the Report.

4.3.2 DPT – technical analysis

You are not required to accept that DPT applies and your use of the Facility will not be taken as acceptance that you consider DPT applies.

In the majority of cases where an acceptable TP resolution can be reached this is likely to eliminate any potential DPT charge.

Where your Proposal to settle all outstanding liabilities will eliminate all of the potential DPT charge, please explain why.

Where this is not the case, please explain and provide an apportionment of the proposal between Corporation Tax and the residual potential DPT charge. This reconciliation can be provided on the assumption that the relevant DPT conditions under section 80, 81, or 86 are met.

4.3.3 Interaction between Section 86 and Withholding Tax

If a S86 ‘avoided PE’ risk arises please consider whether the conditions at Section 86 may be satisfied and ensure that your analysis goes on to consider the application of the WHT rules that were introduced by the 2016 Finance Act. Further details can be found in the WHT section of this guidance.

Following your Proposal to settle all outstanding liabilities you may consider that an existing UK entity and/or permanent establishment is or will be correctly rewarded. As a direct consequence there may be no additional profits to attribute to any avoided PE. While this is a possible outcome, this does not preclude the WHT rules from being in scope. In these circumstances please ensure your technical analysis considers the WHT tax rules that are effective from 28 June 2016.

4.3.4 Corporate residence – technical analysis

Where the Disclosed Arrangements and your Proposal relate to a Relevant Overseas Entity being UK resident for tax purposes then please consider the following:

  • the legal name, legal form, country of incorporation and country of residence of the company for which you wish to make a disclosure
  • in what other countries, if any, the company was or is considered to be resident for tax purposes.
  • whether any treaty non-residency tests are thought to apply, either under domestic legislation or a Double Tax Agreement, including a full analysis of why they are thought to apply
  • an explanation of the basis on which income of the company is or was taxed in the other territory – this should make clear whether all income of the company is subject to tax and what the amount of tax paid in the territory was and whether any of this was or may be subsequently repaid
  • identify the accounting periods in point and whether the above analysis varies by reference to these
  • an analysis of the UK tax charge arising as a result of residence including any claim to Double Taxation Relief
  • whether any Double Taxation Relief or Mutual Agreement Procedure claim is expected to be made outside the UK

Where, in preparation for making a disclosure, you have considered whether there is a residency risk but concluded that an entity was not UK resident then the risks considered should be disclosed as above.

4.3.5 PE – technical analysis

Where you have investigated UK PE risk with respect to a non-resident entity please provide the following information in this section:

  • if the UK PE is considered to be a fixed place of business PE then its physical location and a description of the activities performed there that result in a PE
  • if the UK PE is considered to be a dependent agent PE then the legal identity and form of the UK agent and a description of the activities the agent performs that result in the existence of a PE
  • your analysis should consider both UK domestic legislative tests and any relevant Double Taxation Agreements
  • where you conclude that a UK PE arises then a profit attribution exercise should be performed by applying the separate enterprise principle
  • where your disclosure is that a UK PE exists then:
    • profit and loss, or management accounts drawn up for the PE or the UK operations of the non-resident company
    • if no such notional PE profit and loss has been drawn up then these should be prepared for the purposes of the Report, they do not need to be audited
    • an explanation of which economically significant risks and assets have been attributed to the PE (and which have not been)
    • an explanation of how sales, costs, and profits have been attributed to the PE or UK operations (for example, all EMEA customer sales or sales to a specific category of UK customer or sales of certain products to UK customers)
    • an explanation of how profits have been attributed to the PE or UK operations
  • if your disclosure includes a conclusion that a UK PE does not arise due to a lack of authority for UK staff to do business or conclude contracts binding on the non-resident, please explain how you have reached this conclusion
  • if your disclosure includes a conclusion that the independent agent exemption applies, please explain how you have reached this conclusion

If a PE risk arises please ensure that your analysis goes on to consider the application of the WHT rules that were introduced by the 2016 Finance Act. Further details can be found in the WHT section of this guidance.

4.3.6 WHT – technical analysis

4.3.6.1 Requirements to withhold UK tax for periods prior to 28 June 2016

Prior to the amendments introduced by the Finance Act 2016 Chapter 6, Part 15 Income Tax Act 2007, if you identify a WHT exposure then details of when a deduction from annual payments and patent royalties should be made. Where such payments have a UK source there will be an obligation to withhold Income Tax subject to any override in a tax treaty or similar.

Where you consider that such payments may have a UK source please set out your technical analysis explaining why you consider that the WHT rules should or should not apply. Guidance on ‘UK source’ can be found in HMRC’s Savings and Investment Manual at SAIM9090.

4.3.6.2 Background to announcement at Finance Act 2016

Chapter 7, Part 15 Income Taxes Act 2007 imposes a requirement to withhold Income Tax on certain payments overseas for the use of, or the right to use, intellectual property that has a UK source. The Finance Act 2016 extended the meaning of intellectual property within S907 ITA 2007, which is now aligned with the definition of a royalty for the purposes of the OECD model tax treaty.

The Finance Act 2016 also introduced a statutory sourcing rule at S577A ITTOIA 2005. This applies where royalties or other sums paid in respect of intellectual property are paid by a non-UK resident person and are connected with a trade carried on by that company through a UK PE.

At the same time the rules for the calculation of DPT were amended to ensure that a company with an avoided UK PE under S86 FA 2015 is not in a better position than a company with an actual PE. As a result, where a non-resident company is found to have an avoided UK PE, the notional PE profit calculation must include an amount equal to the total royalties paid by the non-UK resident company that would be subject to the WHT rules under S906 ITA 2007 as if the avoided UK PE was an actual UK PE.

4.3.6.3 Areas FA16 WHT technical analysis should cover

In considering the application of WHT following the changes in the 2016 Finance Act please consider including:

  • whether the payment made by the non-resident entity falls within the updated definition of intellectual property at S907 ITA 2007 or not – please provide an explanation to help us understand your view together with references to any underlying documentation you have reviewed to support your conclusions
  • a requirement of S577A ITTOIA 2005 is that the payment made by the non-resident is made in connection with a trade carried on through a UK PE (extended to an avoided UK PE by the changes to the DPT legislation) – please include whether you consider that this condition is satisfied or not and please provide commentary to support your view
  • S577A ITTOIA 2005 also requires quantification of the amount of payment by the non-resident that has a UK source on a just and reasonable basis – please detail what payments, if any, you consider would be attributable to a UK source together with the reasoning for this, further information can be found at Paragraph 4.14 onwards of the Deduction of Income Tax at source: royalties technical note
  • if you consider that the payment for the use of the intellectual property which has a UK source can be made without the need to withhold tax due to a tax treaty or similar please provide details
  • any other information you think is relevant and pertinent to the technical analysis

4.3.7 CFCs – technical analysis

In such cases a review should be performed by reference to the CFC legislation at Part 9A TIOPA 2010. This should consider whether, and to what extent, any of the company’s profits result in chargeable profits by reference to the charging gateways (chapters 4 to 9) and entity exemptions. Detailed technical guidance is in INTM190000

Be aware that under Chapter 4, Part 9A TIOPA 2010 it can be the case that profits arising from a broader range of transactions than simply those taking place between the UK and the CFC can be chargeable under the CFC legislation

4.3.8 Hybrid and other mismatch rules – technical analysis

Legislation can be found at Part 6A TIOPA 2010 with detailed guidance set out at INTM850000. The rules at Part 6A TIOPA 2010 should be considered in respect of any mismatches arising in respect of hybrid entities, permanent establishments and hybrid financial instruments both within the group and where there are structured arrangements (as defined). The rules seek to counteract any mismatch where a payer or payee is within the charge to Corporation Tax that result in a deduction or non-inclusion, or double deduction scenario.

Any technical analysis of the application of the hybrid and other mismatches rules should be consistent with the above legislation and guidance at INTM850000.

4.4 Section 3: behaviours and conclusions on penalties

4.4.1 Introduction

If we find that additional tax is due, we will always consider the behaviours that have given rise to the error and whether penalties should be charged. The Facility does not offer special terms and the normal penalty provisions and HMRC practice apply.

Our investigations into Profit Diversion to date have established that in a large number of cases the factual pattern outlined to HMRC at the start of an enquiry does not stand up to scrutiny once tested. That may be a result of a careless error (for example individuals within a group being unaware of what the actual facts are) but it may also be a result of a deliberate behaviour, that is a group knowingly submitting a TP methodology in a Corporation Tax Return based on a false set of facts. A common issue is an overstatement of functions performed, assets used and risks assumed in entities taxed at lower rates, and an understatement of the functions performed, assets used and risks assumed in the UK.

Where HMRC suspects there has been an attempt by a group to deliberately mislead, then we will refer the issue to Fraud Investigation Service for consideration of a criminal investigation or civil investigation into fraud.

Having taken advice on a transfer pricing position is not enough, by itself, to show that you took reasonable care to submit an accurate return. You will need to show, amongst other things, that you have asked for appropriate advice, have given your advisors accurate and complete information, have checked the advice in light of the facts and implemented the advice given.

You must explain how you evaluated the behaviours that led to the underpayment of tax and list the evidence considered in doing so (for example, instructions given to an agent to prepare a TP report). You must describe the behaviours that led to the underpayment of tax and explain how you consider the penalty legislation applies and why.

This section must include an analysis of the application of relevant penalty provisions.

The main, but not exclusive, penalty provisions to consider for Profit Diversion are:

  • Para 1 Sch 24 FA 2007 – Inaccuracies in Returns or other documents
  • Para 1 Sch 41 FA 2008 – Failure To Notify

The following fact sheets give more detail:

  • penalties for inaccuracies in returns – CC/FS7a
  • penalties for failure to notify – CC/FS11
  • The Human Rights Act and penalties – CC/FS9
  • suspending penalties for careless inaccuracies – CC/FS10

Any penalty technical analysis included in this section can be submitted on a without prejudice basis if you wish to do so.

4.4.2 Unprompted penalty treatment

Reports received by HMRC through the Facility from businesses that are not already subject to an investigation by HMRC in relation to Profit Diversion, will be treated as ‘unprompted’ disclosures for the purposes of Para 9(2) Sch 24 FA 2007 and Para 12(3) Sch 41 FA 2008, thereby resulting in a lower minimum penalty, including the possibility that the penalty may be reduced to nil for careless inaccuracies, than if the disclosure was ‘prompted’. Read CH82470 to find out about the penalty ranges for ‘unprompted’ and ‘prompted’ disclosures.

4.4.3 Careless inaccuracies in a TP context

CH80000 onwards gives guidance on penalties for inaccuracies.

INTM483120 gives operational guidance on penalties in a TP context.

The Base Erosion and Profit Shifting Action Points 8-10 report (AP8-10 report) published on 5 October 2015 provided more detailed guidance and clarification with respect to the application of Article 9 of the OECD Model Convention. We consider that this guidance did not change the application of the arm’s length principle under Article 9 of the OECD Model Convention but has further informed when an inaccurate return has been submitted carelessly for TP purposes. We consider that how taxpayers responded to this guidance will affect how we view their behaviour in relation to certain inaccuracies.

CH82465 provides details on penalty reductions for the timing aspect of the quality of disclosure with respect to a careless or deliberate inaccuracy penalty. It explains that where a person has taken a ‘significant period’ to correct their non-compliance, they cannot expect the full reduction for the quality of disclosure.

A ‘significant period’ for this purpose is normally considered to be over 3 years from the date the inaccuracy or inaccuracies that are being disclosed first occurred.

HMRC expects businesses to have reviewed their TP policies in light of the AP8-10 report. However, it is acknowledged that it will have taken some time to do that following the release of the guidance and it being brought into UK law by Royal Assent on 15 September 2016. The facts and circumstances of each case will be taken into account in determining whether the taxpayer was careless, but where a TP adjustment is proposed in a disclosure and the error arose wholly because a business had not considered the guidance and clarifications in the AP8-10 report, which made the position taken no longer reasonably arguable, before submitting their return, that inaccuracy will not normally be seen to have arisen because of careless behaviour for returns made by 31 December 2016.

4.4.4 Careless inaccuracies – Senior Accounting Officer implications

If a business is within the scope of the Senior Accounting Officer provisions, it may have concerns about the implications of a disclosure under this facility for the SAO personally. Where a business makes a full and accurate disclosure through the facility and then fully co-operates, an admission of careless behaviour by the business in connection with the disclosure made will not, of itself, be used by HMRC as a reason to consider a possible related past SAO main duty failure or inaccurate submission of a SAO certificate.

4.4.5 Suspension of Careless inaccuracies

Para 14 Sch 24 FA07 allows HMRC to suspend all or part of a penalty charged under Sch 24 (penalties for inaccuracies). The penalty still requires an assessment (or inclusion in a settlement agreement) even though it has been suspended. HMRC guidance at CH83100 onwards applies.

For careless inaccuracy penalties that are not fully reduced by the quality of the disclosure, you should take a view on whether suspension of the penalty is appropriate and the relevant conditions that might be applied during the suspension period in your Report.

4.4.6 Deliberate inaccuracies

HMRC guidance at CH81150CH81151CH81160CH81161 and INTM483120 details the type of behaviours that HMRC consider will constitute deliberate as well as deliberate and concealed behaviours.

Where we are considering deliberate behaviours then we will consider the Deliberate Defaulters legislation at S94 FA 2009 and publishing details of that person on the GOV.UK website for up to 12 months. Fact sheet CC/FS13 has more details. Where a deliberate defaulter provides us with full details of the offence, meaning we don’t need to start an investigation, or where maximum reduction of the deliberate penalty is achieved, then we will not publish deliberate defaulters’ details.

Where disclosure of a deliberate inaccuracy is delayed by more than 3 years, it is normally not possible to earn maximum penalty reduction.

If we have major concerns about the way that arrangements to divert profits have been implemented, and/or suspicions that we have been misled, we refer our concerns to colleagues in Fraud Investigation Service in accordance with our standard procedures. Criminal and Civil investigations into Profit Diversion are already underway with FIS.

Fraud Investigation Service civil investigations are worked in accordance with their Code of Practice 8 or Code of Practice 9 booklets, depending upon the nature of the enquiry.

4.4.7 DPT failure to notify penalties

Guidance on penalties for FTN can be found at CH70000 onwards.

CH73360 provides details on penalty reductions for the timing aspect of the quality of disclosure with respect to a FTN penalty.

CH73180 explains when a non-deliberate FTN is disclosed within less than 12 months of the tax first becoming unpaid by reason of the failure, the penalty reductions for quality of disclosure will be greater than if the failure is disclosed later. The DPT FTN penalty rules provide a penalty can be due regardless of whether DPT is ultimately payable. DPT2035 of the DPT guidance provides more detail. The key implications for making a disclosure through the facility are summarised below.

For a non-deliberate DPT FTN where DPT is treated as first becoming unpaid by reason of the FTN before 1 January 2019 if a business registers by 31 December 2019 to use the facility and goes on to make a full and accurate disclosure regarding the FTN for all impacted accounting periods and full co-operation is provided to HMRC, then the DPT FTN penalty will be reduced to nil.

For a non-deliberate DPT FTN where DPT is treated as first becoming unpaid by reason of the FTN on or after 1 January 2019 if a full and accurate disclosure is made within 12 months of the tax being treated as first becoming unpaid by reason of the FTN and full co-operation is provided to HMRC, the DPT FTN penalty will be reduced to nil.

4.4.8 Illustrative example involving careless inaccuracies in a TP context and DPT FTN penalties

Customer A has a 31 December accounting period end date. It has failed to notify for DPT for its 2015, 2016 and 2017 accounting periods. It submits its returns on 15 December each year. It registers to use the Facility on 1 April 2019 and submits its disclosure report on 30 September 2019 and HMRC accepts the proposal made in the report on 10 December 2019. Its proposal includes:

  • TP adjustments for 2015 to 2017 resulting in additional Corporation Tax but no DPT being chargeable
  • a conclusion that the inaccuracy arose wholly because it had not considered the impact of the AP8-10 report but that it took reasonable care in submitting its 2015 Corporation Tax returns and those prior
  • a conclusion that the inaccuracy arose wholly because it had not considered the impact of the AP8-10 report and it was careless in submitting its 2016 and 2017 Corporation Tax returns, which were both submitted after 31 Dec 2016
  • an assessment that the full penalty reduction applies for the 2016 and 2017 carelessly inaccurate returns as a full and accurate disclosure was being made within 3 years of the date the inaccuracy first occurred and it would fully co-operate with any follow up questions required
  • notifications for DPT for the 2015 to 2017 periods and an assessment that full penalty reductions apply for failure to notify for DPT for the 2015 to 2017 returns as the failure was not deliberate and the notifications for DPT were made by 31 December 2019

If instead the inaccuracies for 2015 to 2017 arose due to careless behaviour (of the company or a related person, for example a person acting on behalf of the company), unrelated to the impact of the AP 8-10 report, with reason to believe that similar careless inaccuracies had arisen for prior periods, then the group would need to include appropriate adjustments and penalty considerations for 2013 onwards in its Proposal through the Facility as the time limit for HMRC to make a discovery assessment for careless inaccuracy is 6 years rather than the normal 4 year time limit.

4.5 Section 4: the proposal

The Report, having considered and provided a view on the relevant facts, the application of the relevant legislation to those facts and the behaviours that led to the underpaid tax, should then set out the proposal to settle all outstanding liabilities including tax, interest and, where applicable, penalties for all relevant accounting periods. All relevant entities, with liabilities arising, within the group should be included.

The proposal should include a calculation, by accounting period, of the proposed adjustments to profits subject to tax together with consequential impacts on, for example loss and group relief and capital allowances, and the tax payable, bearing in mind the behaviours in point and the impact that has for assessment time limits, see CH56200 for further details.

Include a calculation of the estimated interest due and any penalties payable.

Summarise why the reward given to the UK entities under your Proposal is appropriate relative to the system profit associated with the Disclosed Arrangements and the wider profitability of the group as a whole.

Please also explain what changes you are making or have already made to the arrangements or your transfer pricing policies and their tax implications for future years.

All of the content supporting your Proposal section of the Report can be submitted on a without prejudice basis if you wish to do so.

4.6 Section 5: declaration

The Report must be signed by a senior responsible officer within the MNE who is based in the UK (for example, the Senior Accounting Officer, where there is one) and who is authorised to sign on behalf of the UK entities or UK PEs involved in the disclosed arrangements. If there is no single person who can sign on behalf of all UK entities or UK PEs involved in the disclosed arrangements you will need to arrange for individuals who do have the authority to make separate declarations.

The person making a declaration could be, for example: the UK Chief Financial Officer, UK Head of Tax, UK Tax Director, UK Finance Director, UK Financial Controller, UK Managing Director or Chief Executive Officer. They need to make a declaration with the following wording:

I ……. (individual’s name), ……. (role within the MNE), of ……. (name of MNE).

Hereby certify that to the best of my knowledge and belief, this report includes a complete and accurate disclosure to you of all facts bearing upon the liabilities of ……. to the tax, interest and, where applicable, penalties due in respect of matters as required by the Profit Diversion Compliance Facility guidance.

Signed …….

Date …….

 

 

 

 

Annex A: Profit Diversion Compliance Facility registration form

 

Annex B: example of evidence log

 

Annex C: disclosed arrangements flow chart

 

Annex D: UK profit and loss account analysed by transfer pricing policy pre-proposal

 

Annex E: staff profile

 

Annex F: Relevant Overseas Entities revenue and cost profile