At the TP Minds Conference which took place in June 2022 in London, senior tax officials and TP practitioners shared their experiences of dispute avoidance and resolution and other TP-related matters.
HM Revenue and Customs officials (active and former) observed that the interest in unilateral APAs/ATCAs appears to be diminishing and that in many situations a bilateral (or multilateral) APA will be preferable for the taxpayer as potential MAP issues can be avoided.
Over 40% of respondents to a poll question stated that they were currently seeking an APA. The primary motivation was to obtain tax certainty. More than half of the respondents identified “time to resolution” as their main concern related to the process.
These views and comments are borne out by the statistics recently published by HM Revenue and Customs and discussed below.
Transfer Pricing
124 enquiry cases were settled in the 12-month period to March 31, 2021. The additional tax revenue was GBP 2.162 billion - a substantial increase from GBP 1.454 billion raised in the previous year.
Advance Pricing Agreements
APAs are written agreements which are concluded between a business and a tax authority and provide businesses with greater certainty about their tax liabilities. In 2020/21, 24 APAs were agreed by HM Revenue and Customs, which is similar to the average number of APAs concluded over the preceding five years (24.8). However, the average time to conclude an APA increased from 33.0 months in 2015/16 to 55.5 months in 2020/21. It is therefore not surprising to see that the number of applications withdrawn also increased. 11 applications were withdrawn during 2020/21.
Advance Thin Capitalisation Agreements
An ATCA is an agreement concluded between a business and HM Revenue and Customs which sets out how TP rules apply to intra-group funding. The number of agreed ATCAs steadily declined from 164 in 2015/16 to 23 in 2020/21 while the average time to conclude an ATCA increased from 11.7 months in 2015/16 to 28.1 months in 2020/21.
ATCAs are unilateral agreements and TP issues can arise with the tax authorities in the jurisdiction where the counterparty is located (which is not covered by the agreement). In our recent conversation with HM Revenue and Customs, tax officials indicated that such issues were not frequent but that they had arisen in the past.
Mutual Agreement Procedures
MAPs allow taxpayers to resolve double taxation by means of consultation and agreement between the concerned tax administrations. HM Revenue and Customs resolved 62 MAP cases in 2020/21 which is similar to the average number of cases resolved over the preceding five years (64.6). The average time to resolve a case increased from 18.5 months in 2015/16 to 34.4 months in 2020/21.
Diverted Profits Tax
The DPT regime targets contrived arrangements which MNEs might use to minimise their tax liabilities in the UK. Companies must notify HM Revenue and Customs if they have arrangements that potentially fall within the scope of the DTP legislation.
In 2020/21, HM Revenue and Customs received 25 DPT notifications and a DPT net amount of GBP 151 million. The additional tax from TP-settled investigations into DPT (primarily corporate tax) was considerably higher at GBP 1,467 million.
Closing comment
Tax authorities will need to ensure that their resource and capacity is sufficient to process APA, ATCA and MAP applications in a timely manner so that these remain as relevant and practically feasible tools for taxpayers in the future.
Read the WTS Global Transfer Pricing Newsletter here.
