Cross-border tax probes set to rise

Cross-border tax probes are set to shoot up after AstraZeneca decided to settle its transfer pricing issues with HM Revenue & Customs.

The pharmaceutical giant shelled out £505m to reach a compromise with the taxman. Tax experts believe this will trigger more probes by HMRC.

Transfer pricing, or the way companies ferry assets such as intellectual property and services between tax jurisdictions and set a price for these ­services, is one of HMRC’s biggest bugbears with business.

This is because it feels if the price for the services is not set at “arms length”, they are underpriced when they travel to low-tax jurisdictions – disadvantaging the Exchequer.

The taxman has been busy in the past month closing various loopholes – and coming out on top in cases such as against AstraZeneca is only going to strengthen HMRC’s resolve.

“It’s all about how inspectors might read this. If they’re thinking about commencing a transfer pricing audit it will strengthen the possibility,” said Shiv Mahalingham, a director at Alvarez & Marsal Taxand.

Transfer pricing by definition takes place across borders, and wins in other countries have seen the taxman use them as a springboard. UK transfer pricing audits shot up after GSK paid a $3.4bn (£2.3bn) fine to the US Internal Revenue Service in 2006.

But, perhaps in a bid to stop companies heading to other tax destinations, HMRC said it is prepared to help firms before there is a need to hit them with an audit. “Transfer pricing issues can arise simply because some transactions are hard to price. HMRC works with business and other tax authorities to try and ensure that these difficulties can be resolved and that companies are not subject to double taxation on the same profits,” a spokesman said.

Further reading:

HMRC – Transfer pricing: governance structure and processes