UK: Proposals for new transfer pricing documentation, new annual related-party transaction return

UK: Proposals for new transfer pricing documentation

HM Revenue and Customs (HMRC) is consulting on requiring large groups with UK operations to maintain specific transfer pricing documentation and supporting evidence broadly in line with Organisation for Economic Cooperation and Development (OECD) recommendations.


Another measure being considered is a proposal for an “International Dealings Schedule” to be filed with annual tax returns.

If implemented, the proposals would complement other recent efforts by HMRC to increase and improve the information it receives and thus to better target its enquiries. The deadline for responding to the consultation is 1 June 2021.

Read more about the consultation in TaxNewsFlash


Currently, the UK generally does not prescribe the form or content of transfer pricing documentation.

Unlike many other countries that quickly mandated requirements under the recommendations of the OECD BEPS Action 13—Master file, Local file and country-by-country (CbC) report—only the CbC report is currently required in the UK. Otherwise, the general rules on recordkeeping have been viewed as implicitly covering adequate transfer pricing documentation. This may now change.

The flexible approach to transfer pricing documentation has limited the compliance burden faced by UK taxpayers. However, since the OECD published the final Action 13 report in 2015, HMRC has become increasingly concerned that UK businesses are uncertain about their transfer pricing compliance obligations, and the lack of certainty is leading to inconsistent approaches.

The £6 billion in additional tax arising from transfer pricing compliance activities over a 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.

These 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 transfer pricing 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 proposes to introduce a new International Dealings Schedule.

  • All UK businesses within the scope of the UK transfer pricing rules would need to set out details of their cross-border related-party transactions.
  • UK-to-UK transactions would be excluded. 
  • The UK government would also explore materiality thresholds, based on size or tax risk, and the scope for aggregating numerous similar transactions. 

KPMG observation

The proposals would be a major new requirement for non-small and mid-size enterprises (SMEs) with international dealings, and would mark another major acceleration of HMRC’s access to transfer pricing-related data and could likely pose some major data collection challenges for certain businesses with high volumes of intra-group transactions.

The proposals would require all large multinational groups (meaning those currently subject to the UK’s CbC reporting rules) to 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 are already producing a Master file to meet other countries’ requirements, so any additional compliance burden would be 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 could be a commitment from HMRC to engage early in order to allow for faster resolution of issues. Speed, however, would not be the only objective; also targeted is the factual accuracy of the transfer pricing documentation. To this end the consultation is proposing that the Local file (not the Master file) would 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 transfer pricing analysis. These might include, for example, the notes of functional interviews, copies of legal agreements, and system downloads or reports. HMRC already requires this evidence under the PDCF, so tax professionals were not surprised to see a proposed extension in a push for improved quality and consistency of transfer pricing documentation.

HMRC points to benefits to business from standardised, high-quality data and transfer pricing 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.

Read a March 2021 report prepared by the KPMG member firm in the UK

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