TAMD: Tell it like it is - UK transfer pricing documentation developments
The UK is introducing a mandatory Master File and Local File for large groups’ transfer pricing documentation. This needs attention now.
The UK is introducing a mandatory Master File and Local File for large groups’......
The UK’s current transfer pricing (TP) documentation rules are somewhat flexible. Judgement over the extent and content is permitted, provided it represents sufficient evidence to ensure a complete and correct corporation tax return in accordance with the arm’s length principle. However, the Government has perceived this flexibility to generate uncertainty and inconsistency across groups’ TP management. With the OECD’s guidance on documentation under BEPS Action 13, and the increasing adoption of prescriptive rules among comparable tax jurisdictions, the UK now intends to mandate the OECD standardised ‘Master File / Local File’ approach for large groups with UK operations. A consultation earlier this year elicited views from business, professional bodies and advisers. In a good example of open and honest consultation, some areas which generated concern have been modified or deferred. Some concerns remain, and statutory documentation requirements for large groups, aligned with OECD standards, has been confirmed.
OECD-standard documentation is increasingly seen and recommended as best practice, particularly for larger groups. From 1 April 2023, groups with a Country-by-Country Reporting (CbCR) obligation (broadly those with a consolidated global turnover of at least €750 million) and UK operations must maintain a Master File and UK Local File. The documentation need not be filed routinely, but should be prepared before the relevant corporation tax return (and reflected therein) and available to HMRC within 30 days of a request. It also needs to be supported by evidence – more on this in a moment. UK-UK related party transactions remain subject to UK TP but unless there is a material UK tax risk, (e.g. an asymmetry in rates or for transactions across the Oil and Gas ringfence), these need not be documented in the Master File and Local File.
Somewhat surprising was that the decision not to implement or consult further on the proposed International Dealings Schedule (IDS). The IDS would have accompanied the corporation tax return for all businesses with cross border related-party transactions subject to UK TP (i.e. non-SMEs, not just the very large groups covered by the documentation rules). It would have required disclosure of these transactions and the pricing policies applied, with the objective of identifying TP risks across a broader spectrum of businesses (including those international businesses whose tax affairs are handled by HMRC’s Wealthy and Mid-Sized Business Compliance Directorate) and hence informing HMRC’s enquiries. In light of concerns raised, perhaps also with a nod to the current difficult economic environment and ongoing international tax reform, the IDS will not now be introduced. The Government still believes that an IDS requirement could be beneficial for both HMRC and business, so we may see this revived in future.
One of HMRC’s recent objectives has been to ensure that TP documentation is kept up to date and consistent with business operations, supported by evidence. In accordance with this, the original proposal was that the UK Local File should include a detailed evidence log explaining the sources of information in the functional analysis. Again, the risk of disproportionate administration was raised at consultation, and the proposal has now been reduced to a limited ‘Summary Audit Trail’ (SAT). Limited details are available; all we know at this point is that the SAT will be a short, concise document summarising the work already undertaken by the taxpayer in arriving at the conclusions in their TP documentation. The SAT will be an additional legislative requirement which is aimed at encouraging taxpayers to undertake sufficient work to support TP policies and enabling HMRC to undertake high level quality assurance on the TP documentation supporting more focused enquiries on higher risk areas.
Legislation enacting the above is expected in 2022 to take effect for corporation tax returns due on or after 1 April 2023. Depending on the taxpayer’s Accounting Period, this timetable means the rules will cover related party transactions occurring now or which will take place shortly. TP remains a major focus for HMRC, ensuring that related party pricing is arm’s length in light of the functions, assets and risks of the parties, demonstrated by appropriate evidence and analysis. Businesses need to act now to ensure that their pricing policies are supported by up to date, reliable and compliant TP documentation.