The U.K. tax office is giving companies a chance to avoid a 30 percent penalty if they disclose their exposure to the “Google” tax through a new notification program.
The new mechanism, launched Jan. 10, gives corporate taxpayers an opportunity to come clean about their intercompany transactions and pricing arrangements, which are likely in scope for the 25 percent diverted profits tax charge. The higher DPT charge is imposed instead of corporate tax when profits are shifted to low or no-tax jurisdictions, to avoid U.K. tax.
In its Jan. 10 guidance setting out the terms of the new facility, HMRC said it found some multinational companies had adopted cross-border pricing arrangements based on incorrect fact patterns that aren’t consistent with transfer pricing guidelines set out by the Organization for Economic Cooperation and Development.
“Some have made incorrect assumptions, or not implemented arrangements as originally intended or declared to HMRC, so that there is a divergence between the fact pattern on which the Transfer Pricing (TP) analysis is based, and what is actually happening on the ground,” HMRC said.
Her Majesty’s Revenue and Customs, the U.K. tax office, has completed 192 diverted profits tax (DPT) assessments since it came into effect in 2015, and believes there are many more companies that should be subject to the tax.
“HMRC hopes businesses will utilise the facility to engage with us on their tax arrangements. If we’re not satisfied with what businesses tell us, or if they don’t respond to us at all, they risk an HMRC investigation and a DPT charge if DPT applies,” an HMRC spokesman told Bloomberg Tax in an email.
“It’s not a huge incentive so can’t really be construed as a giveaway,” Jason Collins, head of tax at law firm Pinsent Masons, said. HMRC is essentially saying, “instead of you having to prove that you took reasonable care to reduce your penalties you can use the facility and be treated as an unprompted disclosure and give you the maximum relief on any penalties due,” he said.
Avoiding Criminal Investigations
However, the wide scope of HMRC’s powers that allows the tax office to expand DPT investigations to also cover fraud could mean that a reduced penalty isn’t the only benefit for companies that come clean, Collins said.
“In some cases, HMRC has indicated that it will be looking at fraud inquiries, with penalties up to 100 percent, or potential criminal investigation,” he said. This means companies can use the opportunity to demonstrate they didn’t deliberately engage in fraudulent activities.
“HMRC views a lot of businesses of having untenable positions on this tax. In particular, it is looking to target those tech and IP-rich businesses that run their European businesses from Luxembourg, the Netherlands and Ireland,” he said.
But businesses should examine whether it is in their best interest to use the disclosure facility, according to BDO tax dispute resolution partner Dawn Register.
“It is not the only process for making a voluntary disclosure to HMRC. Given the risk of a more serious investigation, any affected business would be wise to seek expert tax advice prior to making any approach to HMRC,” she said.
The tax office is expected to send “nudge” letters next week to companies it deems in line for the tax, advising them to take advantage of a new disclosure mechanism or face stiff penalties for failing to make full disclosure of their transfer pricing arrangements.
Before the Jan. 10 disclosure facility was in place, companies had three months following the end of an accounting period to notify HMRC of potential exposure to the tax. Failure to notify the tax office within the period would have meant a late 30 percent penalty applied, on top of the outstanding DPT due.
“It’s quite a clever tactic by HMRC. By telling companies that they know what they are doing without having to expend manpower to investigate each of these cases, they can get some of these companies to come forward themselves and then focus on those companies that have chosen not to use the facility,” said Jeremy Cape, a partner at law firm Squire Patton Boggs in London.
The U.K. introduced the DPT in 2015 amid concern that Google parent Alphabet Inc. and other global tech companies were avoiding local corporate taxes by stashing profits offshore. Applying equally to U.K. multinationals, the measure sets a 25 percent levy on profits the British government deems to have improperly avoided U.K. taxes. The country’s current corporate rate is 19 percent.
But most DPT audits haven’t been conducted in the tech sector, leading to practitioners concluding DPT is a “Google Tax that didn’t net Google.”
“HMRC has been reluctant to provide data showing how, in practice, it is being used. But we believe the majority of the cases where it’s been used are transfer pricing disputes, where the DPT gives HMRC significant technical, financial and procedural advantages over the standard corporation tax processes,” said Dan Neidle, a corporate tax partner at law firm Clifford Chance.
(Updated with additional reporting throughout.)