The Profit Diversion Compliance Facility (PDCF) is, as described by HM Revenue & Customs (HMRC), a form of ‘co-operative’ compliance whereby multinational entities are invited to update their transfer pricing and review past corporation tax paid.
The facility is aimed at multinationals which HMRC believes are using transfer pricing that is based on incorrect fact patterns or not applying appropriate methodologies under BEPS Actions 8-10 resulting in the diversion of UK taxable profits.
Entering the PDCF is a means of avoiding a Diverted Profits Tax (DPT) enquiry and provides greater certainty over future UK tax. HMRC invites PDCF registration by a ‘nudge’ letter, allowing businesses 90 days to decide if they wish to register for the facility or not.
The facility was initiated in January 2019 and HMRC recently announced that all business in the first tranche of nudge letters that did not enter the PDCF have become the subject of HMRC enquiries. In June 2019 the second batch of nudge letters have been sent, with a focus neither solely on the Large Business Directorate (LBD) nor on a specific sector. HMRC has confirmed that its focus for PDCF is not limited to businesses dealt with by LBD and the bulk of the nudge letters issued to date have gone to mid-sized businesses. HMRC has also confirmed that nudge letters have been issued based on the risk profile of the company rather than industry sector in which it operates.
There are clear benefits for entering the PDCF. The voluntary disclosure arrangements, notwithstanding avoiding being brought within the scope of DPT, allows a company to retain a degree of control of the discussions with HMRC and if managed carefully should be less expensive than having to react to an HMRC enquiry. There are several penalty incentives for companies as the disclosure will be treated as unprompted, despite HMRC’s issuing a ‘nudge’ letter, and penalties for inaccuracies in tax returns will not be charged if the MNE took reasonable care. Once a company has registered, HMRC will not open an enquiry into DPT arrangements nor into Controlled Foreign Company rules before the disclosure report has been submitted.
Once a ’nudge’ letter is received the choice has thus far proven to be binary: register for the PDCF or HMRC open an enquiry. The DPT liability will typically lead to adjustments to the company’s transfer pricing and an increased UK corporation tax liability. The PDCF by contrast involves constructive engagement to discuss facts and highlight areas of concern and revision before submission of the report.
The choice would appear to be simple – or is it? Are there any downsides to entering the PDCF?
A decision to enter into the PDCF should not be taken lightly, as HMRC may not accept the businesses report or proposal submitted under the facility. It follows therefore that the process may not necessarily end with the submission of the report as HMRC’s PDFC guidance makes it clear that it will consider other international tax risks, including:
- Company tax residency (where central management and control or place of effective management of an overseas company may be in the UK)
- UK permanent establishment
- Withholding Tax
- Application of the Controlled Foreign Companies rules
- Hybrid and other mismatches rules.
There is also the danger that the business will not give sufficient attention to the above and therefore it is important that businesses that choose to register with the facility ensure they address all tax risk appropriate to their arrangements and operation and that sufficient time is invested in all tax risk areas to prepare a robust and comprehensive report that can be used to promptly address any post report submission enquiries from HMRC.
Furthermore, the PDCF leaves HMRC with discretion in judgement as to whether a full and accurate disclosure has been made and where they believe there are deliberate omissions or misstatements involved have made it clear that the Fraud Investigation Service will be involved or take over responsibility for conducting any enquiries. So, although there are benefits for entering into the facility there are also risks and the whole process: registration, the post registration meeting with HMRC and the preparation and submission of the report need to be carefully considered and managed.
The report required to be submitted under the PDCF it itself very detailed, containing:
- a description of the relevant facts referenced to the evidence from which they are derived
- an analysis of the application of the tax law to the facts and the conclusions reached
- an analysis of the behaviours investigated, and the conclusions reached on the application of penalty provisions
- the proposal being made to settle all outstanding liabilities
- a signed declaration by a senior responsible officer within the group on behalf of the entity or entities certifying that to the best of their knowledge and belief it is a full and accurate disclosure of the facts, and
- an annex listing the evidence that supports the facts referred to in the report.
Overall the PDCF is a complex process that must be approached with caution and full awareness of the risks involved.
At Blick Rothenberg we already have considerable experience with the PDCF. Combining our tax dispute resolution, international tax and transfer pricing specialists we will work with you in optimising any outcome. Whilst we would generally advise businesses who have received the ‘nudge’ letter to enter the PDCF, they must do so only after a proper assessment of all international tax risks and the implications of these risks in terms of the scope of the PDCF report and settlement proposals with HMRC.
Furthermore, if your company has concerns that it may fall into scope of either the DPT or PDCF we can also advise on any remedial steps with your current business structure to address all international tax risks. We offer a ‘health check’ review of international arrangements and can use this to assess whether existing transfer pricing or other international arrangements need to be revisited and whether the PDCF is recommended. Please do not hesitate to contact the Blick Rothenberg team below.