HMRC pursues tax avoiders in transfer pricing clampdown

HMRC building

The taxman is ramping up a major offensive on companies it suspects of
avoiding the UK’s tax coffers when they shift goods from one place to another as
1,000 transfer pricing disputes remain in the pipeline.

HMRC is looking to haul UK companies over the coals if it believes the price
has been set artificially low in moves to reduce taxable profits, according to
leading tax advisers.

“There are about 1000 open transfer pricing enquiries. We’re seeing a lot
more dispute resolution cases coming through,” said Shiv Mahalingham a managing
director at Alvarez & Marsal Taxand.

“Before the DSG case it was common practice to sit down with Inspectors and
agree the adjustments. However, the revenue is of the view that aggressive
positions are more likely to be taken through to the courts rather than agreeing
a settlement.”

The practice sees multinationals put a price on the value of assets or goods
which are sent from one subsidiary to another, most often across international
borders, and covers everything from sales or purchases of goods and services to
intellectual property, debt or deemed transactions that are not reflected in any

Companies are supposed to ensure an arms-length policy is maintained when
assigning values. HMRC, which has a dedicated transfer pricing group with about
70 specialists, is continuing its clampdown to help maximise tax take in the
uncertain economic conditions.

Mahalingham said the money flowing in from transfer pricing issues had
doubled to over £470m between 2006 and 2007 and HMRC’s clampdown meant errant
companies would continue to find themselves under challenge.

“We know it’s an area the revenue is focusing on. It’s reasonable to assume
that collections from transfer pricing will have increased substantially in
2008/9” he said.

“But you have to draw a strong dividing line between taxpayers who have
adopted reasonable methodologies and those who are being more aggressive in the
way they price intra-group transactions.”

“It’s not a surprise the numbers are increasing. You’d expect them to focus
on the large cases which would be anywhere between £10m and £100m and, in some
cases, much larger,” said Steve Hasson, transfer pricing partner at
PricewaterhouseCoopers earlier this year.

HMRC would not comment on the number of cases but confirmed: “HMRC aims to
resolve transfer pricing enquiries within 18 months for the large majority of
cases and 36 months for particularly complex and high risk cases.

“Over 50% of the transfer pricing checks opened before 1 April 2008 were
closed in the year to April 2009.”

Our litigation and settlements strategy is unchanged following the DSG case.

In our view: Companies will now be on red alert on an issue regarded as
one of the most prominent in tax. HMRC is making no bones about the fact it will
not tolerate what it sees as companies keeping money out of the public purse and
is prepared to do whatever is necessary.

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