Since HMRC clamped down on tax avoidance with increased emphasis on transfer pricing by multi-national companies, they’ve now turned their attention on international brokers. We take a look at making sense of it.
While the impact of the G7’s commitment to a fairer tax system is yet to be felt, the pressure on multi-national brokers to get their transfer pricing (TP) right and be able to defend their international tax position continues to grow.
In the UK, HMRC’s consultation on transfer pricing documentation (the Consultation) is designed to bring the UK in line with other countries and assist them in effectively targeting companies or industries. In addition, it will also impose a significant burden on international insurance brokers.
The three significant changes being considered are:
Mandatory preparation of master file and local files for those companies within the scope of the Country by-Country Reporting (CbCR) regime, ie consolidated income in excess of €750m, and whether these should be filed with the annual corporation tax return or within 30 days of an information request;
The preparation of an International Dealings Schedule (IDS) on transactions with associated enterprises that will be filed with the annual corporation tax return; and
The creation and maintenance of an Evidence Log (EL). This would demand the collection of data at the same time as when transactions subject to TP occur. This would provide the key facts and evidence to support the TP documentation.
TP is a risk area that HMRC are focusing on as they see it as a lucrative source of tax collection. Initially, they considered the TP CbCR reports as the greatest identifier of tax risk, so they never mandated for the filing of master files and local files. However, as co-operation between international tax authorities continues to improve and regularly identifies risk areas for HMRC to target, bringing the master file and local file within the annual reporting requirements will be of major help to them.
Some groups prepare a master file and local country files already, especially as other jurisdictions have more draconian TP rules than the UK. Consequently, HMRC believes that demanding their preparation won’t result in a significant increase in cost to many brokers. Alternatively, the IDS and the EL will result in additional costs to international insurance intermediaries and will apply to far smaller groups than those currently within the CbCR. Potentially, this will cover UK companies within the scope of TP rules, ie non-SME groups, or those with transactions with associated companies based in non-treaty jurisdictions.
The filing of the IDS will bring the UK in line with the international rules of other countries. The standardised format will make it easier for HMRC to analyse data and, when comparing with international data received from overseas tax authorities, allow them to more easily identify where the risk areas are and, consequently, who to look at. The main area of concern for international insurance intermediaries will be the amount of data that they may be required to supply, with examples in the Consultation ranging from a two- to a 24-page return.
Supplying the evidence
Preparing an EL would prove to be expensive to insurance broking groups. The idea stems from HMRC’s Profit Diversion Compliance Facility which was considered a tremendous success in helping to identify and target companies. The EL would show the key facts of transactions as and when they occur and may include such items as interviews with staff or emails. The theoretical advantage for companies is that when subjected to a TP audit, they won’t have to go back and try to identify who was there, how the business was operating three or four years ago and what they were thinking at the time, as this information will be recorded in the EL. However, if this is implemented, the creation and maintenance an EL would be both an expensive and heavy burden for companies in having to answer questions they may never be asked.
Some may say that instead of maintaining an EL, other methods could be adopted, such as third-party certification. Either way, the cost of compliance is going to increase significantly for international insurance intermediaries that are within scope.
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