Arbitration not litigation will solve transfer pricing wrangles

HM Revenue and Customs may have embarked on a huge new campaign targeting the taxation of goods and assets transferred within multi-national companies, but experts are calling for a better way to resolve disputes.

This is, of course, the highly complex and divisive issue of transfer pricing ­ the practice of pricing or handing goods or assets from one part of a company to another ­ and the need for the transaction to be priced at arms length.

Last week Accountancy Age learned HMRC is expecting to increase the number of transfer pricing investigations over the next 12 months.

Between 75 and 100 new enquiries were issued in the past year and experts are currently awaiting a ruling on an HMRC dispute with DSG International (Dixons) over a liability that could run to hundreds of millions of pounds.

What experts want is better systems for resolving transfer pricing rows with tax authorities around the world.

Even HMRC acknowledges on its website the disparity between approaches taken to transfer
pricing in different authorities around the globe.

The taxman says: ‘These administrations ‘are increasingly aware that the transfer pricing of transactions between connected parties can affect their tax yield.

‘Moreover, this is particularly so where the parties to a transaction are subject to different tax rules and rates.’

But there has been a recent move toward arbitration instead of litigation, though leading advisers say politicians are having a big effect on the way cases are resolved. If they apply pressure for higher tax revenues, tax collectors are likely to be much more heavy handed and willing to go to the courts.

According to Steve Hasson, partner of transfer pricing and economic consulting services at PricewaterhouseCoopers, the fact there’s been a recent move towards arbitration with tax administrations is an encouraging sign for multi-nationals.

‘While transfer pricing is becoming a battleground, there has been an effort in producing better dispute resolutions, particularly around arbitration.

‘At the end of the day, the tax administrations are constrained by the political approaches around investment targets,’ he says.

Arbitration is preferred because it reduces the length of time taken to resolve a transfer pricing dispute and the costs in terms of funding big legal teams to fight the tax authorities.

Happily for multi-nationals, Lee Corrick, assistant director of corporate tax and VAT at HMRC, said he anticipates the majority of new enquiries to be settled without the need to litigate.