UK: New transfer pricing documentation rules effective for accounting periods beginning on or after 1 April 2023
Draft clauses confirm that UK members of large groups would be required to maintain transfer pricing documentation in a prescribed form
New transfer pricing documentation rules
The UK government on 20 July 2022 published draft clauses for the next Finance Bill that, as expected, confirm that UK members of large groups would be required to maintain transfer pricing documentation in a prescribed form.
For these purposes, “large groups” are those subject to country-by-country reporting requirements—broadly, those with annual global consolidated revenues of at least €750 million.
What multinationals need to do
- The new documentation requirements would apply for accounting periods beginning on or after 1 April 2023.
- The documentation requirements would be implemented via regulations (i.e., a statutory instrument) that will specify that Master file, Local file and summary audit trail documents must be kept and provided to HM Revenue & Customs (HMRC) on request within 30 days.
- The Master file and Local file would need to contain all the information set out in Annexes I and II to Chapter V of the OECD Transfer Pricing Guidelines.
- The documentation would need to be prepared in advance of a company filing its UK corporation tax return; this point is to be reinforced by changes to the legislation on penalties in Schedule 24 to Finance Act 2007.
- The draft Finance Bill clauses also include changes to HMRC information authority specifically in relation to obtaining transfer pricing related records (to be defined in the future regulations). Changes are to be made to provide that the relevant transfer pricing documents could be requested outside of 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.
- The unique element of the requirements is the summary audit trail that would be a questionnaire detailing the main actions taken in preparing the transfer pricing local file document. A working draft is expected to be published in August or September 2022 for consultation along with draft HMRC guidance on the new documentation requirements.
Transfer pricing compliance continues to be high on HMRC’s agenda, and there is no sign of this abating, given that HMRC published statistics showing a record transfer pricing yield of £2.1 billion in FY20/21.
HMRC officials are increasingly considering the evidence supporting the statements made in taxpayers’ transfer pricing documentation, particularly the functional analysis. Tax professionals understand that the summary audit trail is intended to help HMRC better understand the specific actions large businesses are taking to satisfy themselves that their transfer pricing arrangements meet the arm’s length standard on an annual basis.
HMRC will seek to impose penalties for failure to take reasonable care when a determination is made that a transfer pricing adjustment is required and either: (1) no transfer pricing documentation existed at the time the relevant corporation tax return was filed; or (2) the documentation is found to contain material inaccuracies or omissions due to failure to take reasonable care. Failure to implement transfer pricing policies properly may also lead to penalties, which is why operational transfer pricing is a key area of focus for many large businesses.
What should multinationals be doing to prepare? First, they need to consider preparing robust transfer pricing documentation on an annual basis, that is supported by relevant up-to-date evidence and that contains all the information prescribed for a Master file and Local file in the OECD Transfer Pricing Guidelines.
Groups currently below the €750 million revenue threshold for the new documentation requirements, particularly those within the scope of the Senior Accounting Officer rules, need to take note of the standards being mandated by HMRC for the largest businesses given the changing environment around transfer pricing compliance.
Before the rules enter into force, multinational groups can prepare by:
- Identifying material cross border intercompany transactions involving UK taxable persons that need transfer pricing documentation and establish the quantum of those transactions
- Establishing what existing transfer pricing documentation exists and that explains the transfer pricing policies applied to these transactions and why those policies were selected
- Refreshing the functional analysis for those transactions—it is believed to be likely the summary audit trail would include questions around when a full functional analysis was last undertaken and it would be important to consider how taxpayers would demonstrate to HMRC that the underlying facts have not changed if relying on a previous analysis
- Considering recent changes to the OECD Transfer Pricing Guidelines (e.g., accurate delineation of transactions and control of risk, revised profit split guidance and the new guidance for financial transactions) and whether the transfer pricing policies are potentially impacted by these changes
- Identifying areas or transactions for which access to relevant and qualitative data for transfer pricing documentation or implementation purposes may prove challenging, and anticipate appropriately (e.g., through data quality assessment, refreshed governance)
- Overall, assessing the effectiveness of the operational transfer pricing and documentation strategy and processes, and consider the benefits of technology enablement
Groups with a 31 March year-end are less than nine months away from the start of the first accounting period covered by these rules, so time is of the essence to prepare.
Read a July 2022 report prepared by the KPMG member firm in the UK
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