Tax Day: Documentation decisions

Tax Day: Documentation decisions

HMRC are proposing new transfer pricing documentation rules and a new annual tax return schedule covering related party transactions.

Daniel Head

Partner, National Head of Transfer Pricing

KPMG in the UK


The UK does not generally prescribe the form or content of transfer pricing (TP) documentation. Unlike many other countries, which quickly mandated the OECD’s BEPS Action 13 requirements (Master File, Local File and Country-by-Country Report (CbCR)), only the CbCR is currently in force in the UK. Otherwise, it was previously thought enough that the general rules on record-keeping should implicitly cover adequate TP documentation. This may now change. HMRC are consulting on requiring large groups with UK operations to maintain specific TP documentation and supporting evidence broadly in line with the OECD recommendations. They are also proposing an International Dealings Schedule to accompany annual tax returns. If enacted, the proposals would complement other recent efforts by HMRC to increase and improve the information they receive, and better target their enquiries.

The flexible approach to TP Documentation has hitherto limited the compliance burden faced by UK taxpayers. However, since the OECD published the final Action 13 report in 2015, HMRC have become increasingly concerned that UK businesses are uncertain about their TP compliance obligations and the lack of certainty is leading to inconsistent approaches. The £6 billion in additional tax arising from TP compliance activities over this five-year period and perceived success of the Profit Diversion Compliance Facility (PDCF) have brought into sharp focus the importance of speed and efficiency of intervention in transfer pricing compliance.

The new proposals appear to have been informed by HMRC’s recent experience from the PDCF as well as increased collaboration with other tax authorities.  Feedback from other tax authorities indicates improved TP risk assessment and compliance from Action 13-standard documentation. Additionally, in a number of jurisdictions seen as comparable to the UK, taxpayers must file a schedule of related-party cross-border transactions and the pricing applied, usually with the annual tax return.

HMRC therefore propose to introduce a new ‘International Dealings Schedule’. All UK businesses within the scope of the UK TP rules would need to set out details of their cross-border related party transactions. UK-UK transactions would be excluded.  The Government would also explore materiality thresholds, based on size or tax risk, and the scope for aggregating numerous similar transactions.  Even so, this looks like a major new requirement for non-SMEs with international dealings.  It is also, of course, another major acceleration of HMRC’s access to TP-related data and likely to pose some major data collection challenges for some businesses with high volumes of intra-group transactions.

More expected is the proposal that all large multinational groups (meaning those currently subject to the UK’s CbCR rules) should maintain a Master File and Local File broadly in accordance with Action 13. The assumption (to be tested within the consultation) is that most affected groups will already be producing a Master File to meet other countries’ requirements, so any additional compliance burden is expected to arise mainly from meeting the Local File requirement.  Also following from this assumption is a proposal for a 30-day limit to provide the documentation to HMRC on request.  The quid pro quo for large businesses should be a commitment from HMRC to engage early in order to ensure faster resolution of issues.

Speed is not the only objective, though. Also targeted is the factual accuracy of the TP documentation. To this end the consultation is proposing that the Local File (not the Master File) should be supported by an ‘evidence log’ setting out the key sources of evidence, when they were obtained and how they are being used in the TP analysis. These might include, for example, the notes of functional interviews, copies of legal agreements and system downloads or reports. HMRC already require this under the PDCF, so it is unsurprising to see it extended in the push for improved quality and consistency of transfer pricing documentation.

It seems likely that this consultation will interest a great many UK businesses.  HMRC point to benefits to business from standardised, high quality data and TP analysis, by focusing HMRC’s activity on areas of greatest risk and reducing the enquiry time devoted to establishing the facts. But there are also many questions over the potential impact of these rules. The deadline for responding to the consultation is 1 June 2021, and we would welcome discussions with interested businesses.

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