HMRC pursues several criminal investigations into corporate tax disputes

The UK tax administration has opened several criminal investigations after investigating whether large companies are wrongly paying less UK taxes due to their cross-border financial arrangements.

HM Revenue & Customs opened a criminal investigation into transfer pricing, whereby companies split profits between different countries, in 2018, the organization told the Financial Times – the first time since the introduction of stricter legislation in this area six years ago.

This has since evolved into several live criminal investigations involving transfer pricing disputes, the HMRC added, although it declined to specify the exact number, arguing it risked identifying the companies involved.

Transfer pricing refers to the amount charged when goods or services are sold between two companies of the same group, located in different countries. This can allow companies to legally minimize their tax obligations, for example by undervaluing or overvaluing transactions or allocating profits to low-tax jurisdictions.

However, under OECD rules, companies are required to price transactions as if they took place between third parties and provide tax authorities with specific evidence of how the price was determined.

“HMRC is investigating arrangements to divert profits in order to establish what is really going on in the UK and abroad,” a spokesperson said. “Most of these inquiries are resolved by the company agreeing to change their transfer prices and pay additional corporate tax. However, where there is evidence of dishonesty, as in all dishonesty cases, we will consider opening a criminal investigation. ”

Potential abuses arising from transfer pricing include fraudulent schemes and lies to authority, as well as outright tax evasion.

Closer scrutiny of the tax arrangements of international groups follows global outcry over multinationals shifting profits to low-tax jurisdictions to minimize their bills and ongoing attempts to reform the international tax system.

The UK introduced a tax on embezzled profits in 2015 in an attempt to tackle the problem. This is levied at 25 percent, a higher rate than the corporation tax – which is 19 percent – to encourage good behavior.

The HMRC added that only a “small percentage” of large companies are subject to a criminal investigation, but tax experts said it was highly unusual for the authority to open criminal investigations into tax disputes over the companies. companies.

“[HMRC] tend to avoid suing companies because you can’t put a company in jail, ”said Jason Collins, head of tax at the law firm Pinsent Masons.

John Cullinane, director of tax policy at the Chartered Institute of Taxation, described the development as “a big deal”. HMRC generally considers that even if it disagrees with a company’s transfer pricing agreements, it is an “honest disagreement,” he said.

But Simon York, director of the Fraud Investigation Service at HMRC, told a public webinar in November that they “currently have live investigations involving very large companies where individuals within those companies have lied to us in the framework of a discussion “.

“So let’s say a big organization talks to us about transfer pricing and it plays out like a civil tax discussion, but inside of that there are bogus documents filed or lies told, so absolutely we would borrow the criminal route, regardless of their seniority. are.”

HMRC, which is empowered to initiate civil or criminal proceedings in matters of tax fraud, only reserves the latter for the most serious cases or when it will have a dissuasive effect on others. If sufficient evidence of fraud is found, the tax office can initiate criminal proceedings, but it declined to say whether it had done so in any of the actual cases.

George Turner, executive director of think tank TaxWatch, said the tax office’s traditional approach of prosecuting “transfer pricing irregularities” as a civil problem was ineffective.

“Many tax evasion schemes involve an element of fraud, and we believe that in these cases it would be much more effective for HMRC to prosecute them as a criminal case rather than an avoidance dispute in court. tax, ”he said.

Mark M. Gagnon