UK Closing the Tax Gap: Transfer Pricing Adjustments on the Rise
Is Your Company Subject to the New “Google Tax?”
Multinationals with UK operations should be aware of a new focus on transfer pricing by Her Majesty’s Revenue and Customs (HMRC) which has released new tax audit statistics. Most notably, HMRC has been enforcing a new Diverted Profits Tax (DPT), known as the “Google Tax”, in an effort to crack down on aggressive tax strategies. The DPT assesses a 25 percent tax on shifted profits rather than the standard corporate tax rate of 19 percent.
When Does the Google Tax Apply?
Although the Google Tax was initially used to target large foreign-owned technology companies, both UK and foreign-owned companies across several industries have announced HMRC assessments for the DPT in recent years. The DPT is aimed at targeting companies using any one of the three situations below to create a tax ‘mismatch’:
• A UK company uses entities or transactions which lack economic substance to avoid tax
• A foreign company with a taxable Permanent Establishment (PE) in the UK uses entities that lack economic substance to avoid tax
• A transaction is designed to ensure that a foreign company does not create a PE in the UK through artificial structures
HMRC claims that the UK collected an additional £138 million in tax revenue for the 2016-2017 fiscal year from both enforcement and what they are calling ‘behavioral change’. A link to more information regarding the increase of DPT revenues can be found here.
What is the UK Tax Gap?
Simply put, the UK tax gap is the difference between the actual amount of tax collected by HMRC and the amount that was expected to be paid by taxpayers. HMRC believes the UK has one of the lowest tax gaps in the world and anticipates the DPT will shrink the gap further.
How has HMRC Closed the Tax Gap?
HMRC trumpeted a substantial increase in tax revenue through raising more challenges against the transfer pricing arrangements of multinationals. In particular, the number of DPT notifications issued over recent years has increased. Since the introduction of DPT, 48 notifications were issued in fiscal year 2016 and 145 were assessed in fiscal year 2017 with more to follow.
To learn more, contact Clayton & McKervey’s Transfer Pricing Team.