HMRC collected £1.5bn ($1.8bn) in extra tax from investigations into large corporates shifting profits overseas in the past year, says multinational law firm Pinsent Masons. The brings the total the tax authority has collected from these investigations to £8bn in the past five years.
In the past year, HMRC also settled its largest-ever number of investigations into businesses shifting profits overseas – a total of 175, 41% higher than the 124 settled in the previous year.
Pinsent Masons says this shows the results of HMRC ramping up its scrutiny of large corporates’ tax arrangements around what is known as ‘transfer pricing’.
‘Transfer pricing’ refers to the way multinationals allocate their costs and income between different countries. HMRC suspects that this practice results in some large businesses artificially reducing their tax liabilities in the UK. For example, a multinational business could pay less Corporation Tax in the UK by charging its division in the UK an inflated price for services.
However, Pinsent Masons says HMRC’s increased scrutiny of the tax strategies of large corporates has made it increasingly difficult for corporates to access lower tax jurisdictions. HMRC has become more aggressive in its approach to transfer pricing and more likely to disagree with companies’ justifications for their transfer pricing arrangements.
Pinsent Mason partner and head of tax disputes & investigations, Steven Porter, said: “Given the state of public finances, HMRC is keen to stop profits from businesses being ‘transferred’ from the UK to lower-tax jurisdictions. The success of their investigatory activities to date means this will clearly be an area of continued focus.”
“HMRC has become much stricter in its interpretation of what makes an acceptable transfer pricing arrangement as well as more closely examining the implementation of any transfer pricing arrangements. Cross border transactions now carry even greater risk for multinationals. It is more important than ever that businesses can fully justify to HMRC how they price intra-group transfers.”
HMRC has already said that it will be considering multinationals’ transfer pricing strategies as part of its decisions to charge businesses with the Corporate Criminal Offence of failing to prevent the criminal facilitation of tax evasion.
Porter concluded: “Where companies appear to have been dishonest in their use of transfer pricing to deliberately take profits outside of the UK tax net, HMRC have made it clear that criminal prosecution is an option. Multinationals face the prospect of an unlimited fine and significant reputational damage if found guilty.”