UK Transfer Pricing: Staying Ahead in a Tougher Tax Landscape

Economic papers increasingly highlight reports of frequent disallowed expenses and income reassessments, signalling an era of stricter tax enforcement. The €13 billion tax ruling against Amazon in Ireland, the approximate $6 billion adjustment imposed on Coca-Cola by the IRS, and the £117 million tax settlement that Glencore Energy UK Limited faced are strong reminders that tax regulators worldwide are tightening their grip, and profit-shifting remains the primary driver for these crackdowns.

Beyond profit-shifting, several factors have contributed to heightened tax scrutiny. The digital economy has complicated the taxation of intangibles, high-profile transfer pricing litigations have intensified regulatory focus, and shifts in economic and political landscapes—along with increasingly complex supply chains and financial structures—have further fuelled enforcement efforts. The Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project unearthed loopholes that led to global tax reforms, and regulators are aligning with the BEPS Action Plans. The UK HM Revenue and Customs (HMRC) follows suit by increasing tax scrutiny through audits and investigations and levying penalties on multinational enterprises (MNEs), especially in the transfer pricing domain.

In the UK, like other jurisdictions, transfer pricing rules state how transactions between related parties are fairly priced for tax purposes. This indicates that group companies must align with the international requirements of maintaining arm’s length prices for group transactions. This ensures that companies can be taxed their fair share of profits based on economic activities conducted in the UK.

To enforce compliance, various jurisdictions have released their transfer pricing statistics to showcase the transfer pricing yield trend. HMRC also released the 'Transfer Pricing and Diverted Profits Tax: 2023 to 2024' document on January 27, 2025, portraying the urgency for MNEs to comply with the requirements of transfer pricing documentation and ensure that they are fairly taxed. This document provides a comprehensive summary of transfer pricing yield sources, case settlement trends, and resolution times. It highlights the importance of transfer pricing rules and Diverted Profits Tax (DPT), which play an important role in ensuring that multinationals pay the right amount of tax on their share of profits arising in the UK.  

The report highlights the following key data points: 

1. Transfer price yield, that includes additional tax revenue from enquiries, Advance Pricing Agreements (APAs), Advance Thin Capitalisation Agreements (ATCAs) and transfer pricing Mutual Agreement Procedure (MAP) cases, has increased to £1.786 million in 2023-24, compared to £1.635 million in 2022-23. This represents an increase of 9.24%. The percentage increase from 2018-19 to 2023-24 is 52.78%. 
2. HMRC settled 128 transfer pricing enquiry cases in 2023-2024, a decrease from 153 in 2022-2023. The average time taken to resolve these enquiries was 33.1 months, down from 38.9 months in the prior year. 
3. There was a significant increase in APAs, i.e. agreements between HMRC and businesses to draw a consensus on appropriate transfer pricing methods for certain transactions. In 2023-2024, 27 agreements were finalised, an increase from 15 in the previous year. However, the average time to reach an APA agreement increased to 53 months from 45.5 months, indicating complexity in negotiations.  
4. Most double taxation agreements feature a MAP to resolve tax disputes through consultation. HMRC’s MAP process is detailed in Statement of Practice 1/2018 and the International Manual. 
5. In the 2023–2024 period, HMRC concluded 86 MAP cases, a decrease from the 131 finalised in 2022–2023. The average time taken to resolve a MAP case remained similar, with a minor increase to 28.8 months from 28.4 months in 2022-23. 

The DPT, a powerful tool of the UK’s tax enforcement, was introduced in April 2015. This UK-specific anti-avoidance tax discourages the transfer of profits out of the UK using artificial arrangements. The report highlights that the net amount received from DPT notices was £108 million in 2023-2024. Additionally, an estimated £117 million in extra tax, primarily corporation tax, arose from transfer pricing-settled investigations into diverted profits.
 
HMRC imposes a penalty of up to 30% for incorrect transfer pricing documentation plus the 31% Diverted Profits Tax (DPT) on misallocated profits. The DPT is a deterrent tool that most jurisdictions do not impose, making it a unique enforcement tool. 

These numbers have a story to tell, a warning to issue. HMRC in the UK issued guidelines a few months back highlighting the common risks in transfer pricing approaches (GfC7), which is an indication that tax avoidance related to transfer pricing shouldn’t be taken lightly. The regulators have all hands on the table with 395 full-time equivalent staff working on international tax issues, including transfer pricing and DPT. 

The UK governance focuses on a proactive approach by management, using the Profit Diversion Compliance Facility (PDCF), a tool introduced in January 2019. The PDCF is a voluntary disclosure tool that gives MNEs an opportunity to disclose and correct their transfer pricing positions and avoid investigation by HMRC. Making a voluntary disclosure promises less aggressive scrutiny, but not the absence of it. A whopping £830 million in additional revenue has been secured from resolution proposals and changes in customer behaviour since the PDCF was introduced.

MNEs can build tax regulators' trust, safeguard their reputation and investor confidence, and avoid costly penalties by incorporating a proactive attitude that focuses on documentation, monitoring and engagement. Here is the detailed five-step proactive strategy:  

Comprehensive Transfer Pricing Documentation​​​​​​​: 

The foundation of transfer pricing policies is maintaining transfer pricing documentation on a contemporaneous basis. Such transfer pricing documentation will not only help audits to conclude promptly but also devise intercompany pricing and regular checks, which will mitigate the risks early and aim for transparency.  

Robust documentation ensures that intercompany transactions are well structured, justified and audit ready. Businesses must maintain the Master file, Local file and CbCR (Country-by-Country Reporting) documentation in line with the OECD BEPS guidelines and HMRC requirements, and document all supporting evidence and analyses.

Save Reputational Damage Through Enhanced Risk Management:  

Enforcement is only necessary in the absence of internal risk compliance and management. MNEs must develop a stringent system to identify intercompany transactions and flag them for review, possibly with the help of automated tools. Internal teams like finance, legal and tax must collaborate to identify inconsistencies early, which is only possible when teams are continuously trained. Cracks must be sealed before they turn into gaping issues.  

Periodic Benchmarking Review:  

Regular audits and reviews will help in identifying gaps that have crossed the first line of gatekeeping. Transfer pricing benchmarking exercises must be conducted periodically, depending upon changes in the business cycle, to ensure alignment with OECD policies and HMRC tax rules.

Leveraging HMRC’s Regulatory Framework:  

With HMRC regularly issuing guidance on Transfer Pricing, thereby tightening the regulatory framework, adhering to Transfer Pricing policies is a mandate rather than an option. Further, the HMRC provides tools for voluntary disclosures like APAs that allow MNEs to agree on pricing methodologies in advance; hence, these should be proactively utilised for high-risk, high-value transactions. The PDCF is another tool that can save MNEs costly penalties when acted upon.  

Engage with Regulators:  

The business world is witnessing a paradigm shift due to globalisation and digitalisation; hence, open dialogues with regulators on evolving business models, voluntary disclosures, and timely responses to queries will help build trust.