top stories

Comments by ACCA
to HM Treasury

September 2007

The Association of Chartered Certified Accountants (ACCA) welcomes the opportunity to comment on the above document.

As identified in the course of the Varney review of Links with large business, transfer pricing is one of the key areas where interactions between HMRC and large business take place. In a globalising economy, international transfers of goods and services within a group are increasingly important. Fiscal defence of transfer pricing can have a significant impact on companies' operations, costs and, ultimately, their competitiveness. We therefore welcomed the proposals in the Varney Review for HMRC to introduce a more efficient approach to undertaking transfer pricing enquiries and to developing, in partnership with business, the guidance which will be part of the new approach.

In overall terms, we think that the internal guidance set out in the document will provide :

• more clarity – e.g. on the identification of the relevant transactions, the criteria by which they will be judged, on the timescale (and therefore the likely costs) of the enquiry.
• more transparency – on how HMRC assesses risk and its own business case for launching an enquiry
• more understanding of what HMRC expects from business.

All these measures will help to ensure that any enquiry once launched should be carried out with reasonable efficiency and speed.

We would, however, like to know when the guidance referred to in the Varney review will be published since we understood this to mean substantive guidance on transfer pricing issues rather than just on the conduct of enquiries.

We had also hoped that the Varney review would result in a more obvious change in the nature of the relationship in relation to the handling of transfer pricing. As envisaged in Sir David Varney's foreword, the review called for a significant change in attitudes and behaviours from both HMRC and business. We do not see any evidence of such a significant change in the above document, which appears to represent a “business as usual” approach.

We would therefore have liked to have seen many more new ideas on how this area might be transformed from one embodying an adversarial “win/lose” approach to a more collaborative “win/win” approach.

In order to explain what we have in mind, we should first of all point out that companies will generally see transfer pricing very much as an area of “risk”. An HMRC enquiry raises the probability of additional costs through the use of specialist advisers as well as the time of their own tax staff and the opportunity cost of business people diverted from normal business operations. The risks include the possibility of additional tax and interest, for which there will likely be no provision and little chance of corresponding adjustments in the overseas country. The business may be hit by the implications of year on year repeated adjustments unless the pricing basis is amended. The tax department's performance may also be rated downwards.

We would therefore suggest that it is unlikely that companies would pursue tax avoidance by means of aggressive or indefensible transfer pricing policies and practices.

We would therefore like to see a change in emphasis to one of getting it right first time, in line with the thrust of the LBS operating model and the general direction of the Varney Review. This could involve suitable incentives for companies to engage in APAs or similar processes. Companies would gain from the assurance that they will not suffer double taxation or business disruption, while HMRC would gain assurance that future tax yields are protected.

In the light of their own experience, HMRC may therefore come to see that the future revenues from voluntary compliance are more important than the amounts which may be derived in additional revenue from backward looking enquiries. A suitable incentive could therefore include an agreement that, provided the changes were introduced immediately, they would be prospective rather than retrospective in their application. Reducing or removing the costs and risks related to the past will help the two sides to come to a win/win agreement much more rapidly.

In addition, we believe that that such an approach would significantly enhance the reputation of the UK as a good place to do business, since this will often rest on how these issues are addressed.

We will be happy to participate in any future discussions on this or related issues.

Back to top