Key Facts
- •HMRC issued diverted profits tax (DPT) charging notices to three UK-resident Thomson Reuters companies totaling over £167 million for the 2018 accounting period.
- •The lawfulness of the notices hinged on whether they were inconsistent with a 2013 advance pricing agreement (APA) between the companies and HMRC.
- •The APA, covering 2008-2014, used a cost-plus methodology for transfer pricing.
- •HMRC argued that for the 2018 period, a profit-split methodology was appropriate for DPT purposes and issued DPT notices reflecting this.
- •The companies challenged the DPT notices, arguing inconsistency with the APA.
Legal Principles
The lawfulness of DPT charging notices depends on whether they are inconsistent with the terms of a prior APA.
This case
An APA is a statutory contract under Part 5 of the Taxation (International and Other Provisions) Act 2010 (TIOPA), determining transfer pricing methodology for specified periods. Section 220 of TIOPA dictates that during the APA's term, tax matters are determined according to the agreement, not otherwise.
TIOPA
Corporation tax is an annual tax; decisions from one year do not bind future years.
Caffoor v Income Tax Commissioner [1961] AC 584 (PC)
HMRC's powers do not extend to making binding agreements on future tax assessments.
Al Fayed v Advocate General for Scotland [2004] STC 1703
The interpretation of "chargeable period…to which an advance pricing agreement relates" in TIOPA s.220(1) is to be determined by examining the APA's terms, focusing on the periods for which it makes provisions.
This case
Outcomes
The appeal was dismissed.
The Court held that the 2018 accounting period was not a chargeable period to which the APA related under TIOPA section 220(1). The APA's terms, specifically its temporal limits (clause 9) and the annual nature of corporation tax, dictated that its effect was confined to the specified period (2008-2014). The DPT notices, therefore, were not unlawful.