On 10 January 2019, HMRC launched a new Profit Diversion Compliance Facility (PDCF) aimed at multinational enterprises who have used cross-border arrangements that HMRC considers may result in an artificial reduction in UK profits, including arrangements targeted by the Diverted Profits Tax (DPT) legislation.
HMRC has already identified hundreds of businesses with red flags present and will be issuing warning letters to many, drawing attention to the PDCF and related guidance, and inviting them to take advantage of the settlement opportunity.
The PDCF will provide multinationals with an opportunity to approach HMRC with full details of their cross-border transactions with other group companies and make a disclosure of potential tax liabilities without the repercussion of penalties (which could otherwise be up to 100% of the tax involved).
HMRC has set out a number of examples of what it considers to be indicators or red flags of a risk of profit diversion. Such indicators result in the UK receiving limited reward and profits thereby reducing UK tax. For example, overseas entities in low tax territories holding the legal title to valuable intangible assets (such as trademarks or patents) and procurement hubs in low tax countries and the movement of supply chain functions from the UK to such countries.
Registering with HMRC offers businesses several benefits, including control over HMRC’s fact finding and enquiry process, a lighter touch and accelerated approach to settlement, potential reduction in penalties, and reduced tax risk and greater certainty for the future.
It is clear that the initiative sets out HMRC’s tougher and clearer approach to international tax risk and profit diversion. Businesses should therefore undertake a thorough review of their cross-border transactions and consider whether they display any ‘red flags’ in deciding whether to register for the PDCF.