17 February 2023
HMRC has published draft secondary legislation that will, if approved, become ‘The Transfer Pricing Records Regulations 2023’. The draft regulations set out the documentation that large multinational enterprises (MNEs) and their UK entities will be required to prepare and retain to support their transfer pricing policies for accounting periods starting on or after 1 April 2023. Although the publication of the draft regulations is part of a consultation process, we do not anticipate wholesale changes between now and when they take effect.
Who is affected?
The proposed regulations require taxpayers that are constituent entities of large MNEs to retain certain documentation that meets the requirements of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines). An entity or group of entities is a large MNE where it has a taxable presence in more than one jurisdiction and consolidated turnover of €750m or more. This will therefore impact both large UK headquartered groups and UK subsidiaries and permanent establishments of large overseas parented groups.
Although the draft regulations will only apply to the largest taxpayers, it is expected that the approach will be considered best practice for smaller groups subject to UK transfer pricing legislation.
What is required?
MNEs and each of their relevant constituent UK entities that are subject to the draft regulations will have to prepare and maintain a master file and local file, as appropriate, that comply with the OECD Guidelines. The regulations require the documents to incorporate the specific information set out in Annexes I and II of Chapter V of the OECD Guidelines but, in summary:
- the master file covers relevant information common to and for the group as a whole; and
- UK local files set out, for each relevant material transaction involving the UK entity concerned, details of the transaction, the appropriate functional analysis, and an economic analysis supporting the transfer pricing methodology adopted – other than in the case of patent box claims and ring-fenced UK trades, the transfer pricing policy for UK-UK transactions does not need to be documented within the local file.
These documentation requirements will be familiar to and already followed by many businesses that are large enough to be subject to the draft regulations. However, the new mandatory obligation to maintain them should focus the minds of those UK entities without existing appropriate documentation, or those where documentation is older and not yet updated annually.
The draft regulations also allow HMRC to specify supplementary information that is to be retained in addition to these files. HMRC intends to use this power in the future to introduce a further requirement for in-scope MNEs to retain a summary audit trail (SAT) document relating to the preparation of the local file. The specific requirements in relation to the SAT will be subject to a further consultation process and we will provide further comments on these in due course. As part of the consultation on the draft regulations, we have already emphasised the importance of giving businesses adequate time to prepare for the proposed SAT requirements.