New transfer pricing documentation requirements for UK businesses

New transfer pricing documentation requirements for large multinational businesses from 1st April 2023

HMRC have issued a Policy paper (accessible here) on 20 July 2022 which sets out its position on the UK transfer pricing documentation requirements.

What does the measure entail?

Until recently the UK’s transfer pricing documentation requirements were governed by generic record keeping requirements for businesses to keep sufficient records to deliver correct and complete returns. However, the absence of specific transfer pricing documentation requirements, and supporting guidance, led to uncertainty for UK businesses regarding the appropriate transfer pricing documentation they need to keep, leading to inconsistency of approach.

To address this, HMRC had issued a public consultation in March 2021 inviting views on the proposed change on documentation requirements. Based on inputs, HMRC has now issued this Policy Paper which concretises that large multinational businesses operating in the UK have to maintain a master file and a local file in a prescribed and standardised format, as set out in the OECD’s transfer pricing guidelines. It also introduces a requirement to complete a summary audit trail, which is a short questionnaire detailing the main actions undertaken in preparing the transfer pricing local file document.

Who is likely to be affected under this measure?

Primarily large multinational businesses i.e., those with a taxable presence in the UK – for example, through a UK company or permanent establishment – and are within the Country-by-Country Reporting regime (have global revenues of 750 million euros or more), as well as, potentially, individuals with ownership interests in these.

When does this measure come into force? 

The operative date for the application of this measure is set as 1 April 2023. This means it will apply to businesses with accounting periods commencing on or after 1 April 2023.

Is this likely to significantly impact the existing transfer pricing requirements in the UK?

OECD had recognised the importance of having the right information at the right time to identify and resolve transfer pricing risks. Through the BEPS Action 13 Final Report which was issued in 2015, OECD had introduced guidance on a standardised approach to transfer pricing documentation. The standardised approach comprises:

• a master file containing standardised information relevant for all multinational enterprise group members
• a local file referring specifically to material transactions of the local taxpayer
• a Country-by-Country report for the largest multinational enterprise groups containing aggregate data on the global allocation of income, profit, taxes paid and economic activity among the tax jurisdictions in which it operates   

HMRC on its part expects that as a result of having to clearly report transfer pricing information within documentation, businesses will often as a result have a clearer and more robust transfer pricing position to inform the filing of the Corporation Tax return, and this may encourage and incentivise businesses that adopt higher risk transfer pricing positions to change their behaviour.

Our view on this Policy is that UK businesses are already required to keep and retain sufficient records to demonstrate that their tax returns are complete and accurate, including in respect of any figures affected by the transfer pricing rules. As such, this Policy only concretises what was always expected from large multinational businesses – preparation and maintenance of transfer pricing documentation in an OECD prescribed, standardised format. Accordingly, this part of the Policy should not lead to any undue hardships for taxpayers.

Are there any changes expected to existing UK laws?

Taxpayers should keep note of the following changes to the existing laws:

• Current law on record keeping for companies is contained in paragraph 21 of Schedule 18 to Finance Act 1998. Current law on record keeping for individuals and partnerships is contained in section 12B of the Taxes Management Act 1970. New powers are being built into each of these pieces of legislation to enable regulations to specify transfer pricing records (the master file, local file and summary audit trail questionnaire documents) which must be kept and preserved.
• Current law on information and inspection powers is contained in Schedule 36 to Finance Act 2008. Revisions are expected here as well and will aim to ensure that an information notice can specify transfer pricing information or documents, as well as the means by which, and the form in which, these are provided. It is also expected that the relevant transfer pricing documents can be requested outside an enquiry and to remove the requirement for the documents to have to be in the “possession or power” of the UK entity in question when they are in the “possession or power” of another person within the multinational group.
• Current law on penalties for errors is contained in Schedule 24 to Finance Act 2007. The intended revisions here are intended to put it beyond doubt that failures to do the work necessary to maintain the relevant records or to produce those records on request will lead to the presumption that an inaccuracy is careless. The relevant taxpayer can only displace this presumption by providing the documents and evidencing the underlying transfer pricing information had been prepared in advance of filing their Corporation Tax return, or otherwise showing they took reasonable care.

Get in touch 

If you have any questions regarding the change in Transfer Pricing requirements, or would like to discuss further your Transfer Pricing strategy, please get in touch with Ashish Bhatnagar, Chris Danes, Alison Conley or Chris Denning.