Research Specification into customers' experience of the Profit Diversion Compliance Facility & the Diverted Profits Investigation Approach

Overview

HM Revenue & Customs (HMRC) invites suppliers from the Research Marketplace agreement (RM6018) to undertake research aimed at understanding customers' experience of the Profit Diversion Compliance Facility (PDCF) and the Diverted Profits (DP) Investigation Approach.

HMRC intends for this contract to be in place by 16th December 2021, with final outputs required by 29th June 2022.

HMRC will maintain the overall management of the project.

Context

Profit diversion is HMRC's largest Corporation Tax risk, with the OECD estimating global tax losses of $100-240bn/pa. HMRC are keen to further improve efficient ways of tackling profit diversion.

A key area of profit diversion is the diversion of profit (DP) by large groups that: (i) Seek to avoid creating a UK permanent establishment that would make a foreign company liable to pay UK Corporation Tax, or (ii) Use arrangements or entities that lack economic substance to exploit tax mismatches either through expenditure or the diversion of income within the group.

There are two intervention approaches* to tackling profit diversion (all customers involved in this research will have completed one of these processes):

1.The PDCF: this facility gives multi-national enterprises (MNEs)using arrangements targeted by the Diverted Profits Tax (DPT) the opportunity to bring their UK tax affairs up to date.

2. DP enquiries: HMRC has identified a number of MNEs in a variety of business sectors that could be diverting profits. HMRC have established a Programme of investigation of the arrangements of these MNEs. This will involve a review of the customer's transfer pricing arrangements. Customers under enquiry may also face a potential DPT charge, which requires an upfront cash payment whilst the enquiry is ongoing if the relevant legislative conditions are met, and, depending on the cause of inaccuracies or failures to notify, they may face penalties or civil/criminal investigations. N.B. most PDCF and DP enquiries are settled by agreeing transfer pricing adjustments, in many cases, without DPT being charged.

Independent qualitative research is essential to:

•Understand independent customer views on the PDCF approach/process, informing design of new compliance facilities and accompanying guidance in significant tax risk areas.

•Compare customer experience (PDCF-vs-enquiries).

•Provide further insight to feed into the Large Business Tax Admin Review.

•Understand the incentives and blockers for customers choosing to participate in the PDCF.

The findings from this research will be used to inform improvements in HMRC's strategy for tackling profit diversion and consider the appropriateness of any wider use of a compliance facility for large business, delivering upstream/downstream yield, HMRC efficiencies and improved compliance standards.