During the COVID-19 pandemic, UK businesses increased profit shifting

HM Revenue and Customs (HMRC) is conducting 100 investigations into multinational corporations' tax affairs, including profit-shifting arrangements. DPT revenue has increased significantly during the COVID-19 pandemic, according to the revenue service.

The transfer pricing (TP) yield has increased significantly, owing to additional tax revenue from inquiries, according to the diverted profits tax statistics (including real time interventions). According to HMRC data, the TP yield for 2020-21 was £2.1 million ($2.7 million).

Most importantly, the DPT net amount for 2020/21 has increased to £151 million, a significant increase from £17 million the previous year.

In the United Kingdom, tax avoidance claims may be scrutinized more closely. Although the majority of businesses have completely legal, above-board tax arrangements, they are facing ethical criticism over tax.

"It is, for the tax authorities, to come together to discuss where they should be paying that amount of tax, to make it easier for the corporations so that they can do what they want to do, which is creating shareholder value and just focus on the business rather than focusing their energies on dealing with tax issues," Rachit Agarwal, TP director at DLA Piper, said.

HMRC statistics, according to Agarwal, show a clear lack of trust between the tax authority and the taxpayer. To avoid future surprises, he suggested that more businesses begin a dialogue with their HMRC inspector.

While HMRC's data indicates a lack of communication between tax authorities and taxpayers, TP directors believe the OECD's pillar two proposal will be a "game-changer" in combating multinational profit shifting.

"Pillar two will make a big effect in a way that you have to calculate jurisdictional tax burden, and then it will be provided to tax authorities," said Sanna Jäälinoja, Outokumpu's group head of TP.

"If countries agree to keep the corporate tax at a broadly similar level, the whole objective of multinational enterprises [MNEs] utilising a favourable tax regime of one country will no longer be working," Rushabh Vora, director, corporate tax & global TP Crowe Mak Consulting, UAE, added.

According to Alex Cobham, CEO of the Tax Justice Network, the OECD's pillar one proposes to go beyond the arm's-length [WJ(5]principle (ALP) only for a small percentage of multinational profits.

"What we are seeing today is a continuous record level of profit shifting. Ultimately, we need to move to unitary taxation so that multinationals don’t make profits within a subsidiary but make a profit as a unit of the group as a whole, ," he said.

Limiting the scope

More targeted policies may also aid governments in raising revenue and reducing the risk of profit shifting.

The anti-tax avoidance directive III (ATAD III) is intended to prevent the use of shell companies or entities that have no real economic activity and are managed by a hired service provider. This could provide more relevant data to tax authorities and make profit shifting more efficient.

"Receiving this information categorically could potentially feed tax authorities with a lot of information on potential challenges," said Frederik Boulogne, a tax lawyer at BDO and University of Amsterdam lecturer.

"Holding entities and financing entities being interposed in group structures can start to take place when all this information becomes available to the local tax authorities," Boulogne said.

As a result of Brexit, the UK may be denied access to implementing regulations such as ATAD. Unless the British government adopts similar anti-avoidance policies, it will lose additional tax revenue.

According to the Tax Justice Network 2021 report, countries lose an estimated $483 billion in tax each year due to global tax evasion. Cross-border tax arrangements are thought to be responsible for $312 billion of this loss.

To avoid paying high taxes, businesses have sought out tax loopholes. As a result, more businesses are shifting profits abroad to lower their domestic tax burden, especially since COVID-19, a practice that has cost governments millions of dollars in revenue. Due to a lack of resources and time dedicated to investigations, developing countries have suffered the most from tax evasion.

According to a study by the Economic Commission for Latin America and the Caribbean, corporate income tax evasion in Latin America accounted for 58 percent in 2020, with a significant portion of the region's wealth held offshore.

While countries have made progress in implementing tax transparency measures such as automatic exchange of information (AEOI), the OECD's Tax Transparency in Latin America 2022 report finds that AEOI usage in the region is still lacking.

Tax transparency regulations such as DAC6 and CbCR have been implemented in response to multinational profit shifting, but TP directors are skeptical of the "compliance overload" and broad scope of anti-tax avoidance policies.

In order to combat harmful BEPS practices, more focused reporting requirements on TP will be necessary. Meanwhile, tax directors must initiate conversations with tax administrations, as profit shifting remains on the radar of governments seeking additional revenue, and countries have yet to fully implement the OECD's pillar two. The "game-changing" policy could be crucial to rebuilding trust.

By fLEXI tEAM