A&M recently spoke with the Head of the UK Tax Authority Transfer Pricing Team regarding key issues impacting business. Here is a summary of the key points, followed by the discussion:
- At present, there is no UK support to introduce safe harbours and a hindsight test for transfer pricing although the ongoing Organisation for Economic Cooperation and Development (OECD) consultations in these areas will be considered.
- The interaction of transfer pricing with the new UK patent box regime is still in its infancy and HMRC is still formulating thoughts on the key issues.
- There is no specific push for transfer pricing audits, but HMRC has observed an increase in the number of tax efficient supply chain reconstructions and will look to audit these transactions in the first instance.
- HMRC has also seen an increase in the number of Advance Pricing Agreements (APA) applications and a strong desire from international tax administrations to improve their own APA process using UK experience.
A&M: What are your thoughts on the three OECD transfer pricing consultations around intangibles, safe harbours and timing issues with economic analysis?
HMRC: HMRC has been reviewing intangibles and we support more detail in this area to minimise disputes going forward. Although we don't favour safe harbours, we will consider the consultation findings. With respect to timing issues - HMRC sometimes finds new comparables to be useful, but we don't favour re-opening cases based on new information that becomes available. Transfer Pricing (TP) software has become more sophisticated and contemporaneous and HMRC apply the latest software.
A&M: Many clients have raised the interaction of TP and the patent box regime, especially the interaction between Intellectual Property (IP) that qualifies and IP that does not qualify. There is strong interest in the patent box regime and some clarity would be welcome.
HMRC: This is still in the early stages as we formulate our thoughts, but it is good to hear that there is positive feedback about the process. We will review this in the coming months. General transfer pricing principles will apply and certainty may be available through the APA process depending on the situation.
A&M: We have discussed holistic clearances in the past and this is one example where an "APA plus," including an assessment of the IP tax considerations, would be welcome for businesses.
HMRC: The APA can and does often involve teams from direct tax who can provide informal comments relating to non-TP matters. However, there is no plan for a statutory clearance to cover all bases.
A&M: A&M has received more requests from clients for APAs and Advance Thin Capitalisation Agreements (ATCAs); A&M has a good proportion of overall TP certainty clearances in progress in the market (according to the most recent statistics). Our clients only look at operationally-based planning and are not involved in aggressive structures so an APA is an obvious solution for certainty. Is this a trend you are also witnessing?
HMRC: We are receiving a significant number of APA applications and requests for other tax administrations from businesses looking to improve their own APA regimes using shared best practices and UK experience. APAs continue to be sought where an audit is already in place. HMRC is aware of an increase in tax efficient restructurings in the market and will look to audit these in the first instance. It is correct that many of these are based on commercial restructurings.
A&M: We had a multilateral APA discussion with the Internal Revenue Service (IRS) in November and whilst the approach was practical and commercial, we were informed that, due to resourcing, they would not look at the APA submission for four months. This is unfortunate.
HMRC: We are trying - and currently managing - to keep on top of applications in the UK. HMRC have a strong team and are committing to turning applications around as expeditiously as possible. Clearly the better informed, researched and structured the application, the smoother the process.
A&M: A&M has been contacted by an increased number of businesses who have received a TP enquiry in 2012. There seems to be an increase in transfer pricing audits. Are you seeing a trend?
HMRC: If you mean is there a push on transfer pricing audits, then the answer is no. As discussed, we are seeing more restructuring and reconstructions and these will often be audited to assess the transfer pricing applied due to complexity and materiality.
A&M: IP is one key area at the heart of planning, APAs and dispute resolution. We are optimistic that the OECD and HMRC consultations we have been involved in will help businesses to tackle this complex area.
HMRC: IP issues are frequently brought to our attention and the team has been involved in an exercise to share best practices across HMRC's transfer pricing group. The work of the OECD should bring increased consistency and clarification to this area.
A&M: What are key your recommendations for UK business?
HMRC: Keep a watchful eye on transfer pricing policies before it escalates out of control and avail yourself of the APA process if relevant / applicable.
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