New transfer pricing documentation requirements are on the way

HMRC published a consultation document in March 2021, to obtain the views of stakeholders in connection with proposals to update and strengthen of the current UK transfer pricing documentation requirements for multinational enterprises (MNEs). It has recently published a summary of the responses it received and the changes the Government intends to make to UK tax legislation that are expected to take effect from April 2023.

What is changing?

Firstly, it is proposed that UK members of MNE groups within the scope of country-by-country (CbC) reporting must:

1. maintain transfer pricing documentation to support their intra-group transactions in line with the master file and local file approach recommended in the OECD’s transfer pricing guidelines, as updated by action 13 of the base erosion and profit shifting (BEPS) action plan; and
2. maintain a summary audit trail of work done in preparing that documentation.

Master file and local file

The Government will publish draft legislation for consultation in 2022, with the aim of introducing the new requirements with effect from April 2023. It is proposed that the master file and local file documents will need to be prepared in advance of filing a UK entity’s tax return and submitted upon request by HMRC within 30 days. A de minimis threshold is proposed, meaning small, low risk transactions will be out of scope. However, whilst the Government acknowledges the need for transfer pricing documentation to focus on material transactions, the way in which this will be achieved and any monetary threshold that would apply has not yet been decided. Details are expected to be announced during 2022.

If all intra-group transactions fall beneath the de minimis threshold, no UK local file will be required, but taxpayers will be expected to maintain evidence showing why their transactions are not material. 

Similarly, relevant transactions between UK entities will not need to be documented where there is no material UK tax risk.

As many consultation respondents noted, many MNEs within the scope of the CbC rules will likely already be preparing a local file, such that this additional legal requirement may be little more than a technicality for many UK businesses. 

Summary audit trail

The Government also intends to introduce a requirement for in-scope businesses to maintain a summary audit trail (SAT) to sit alongside their UK local file. This will be a ‘short, concise document summarising the work already undertaken by the [taxpayer] in arriving at the conclusions in their transfer pricing documentation.’ Essentially, the detailed ‘evidence log’ in support of the local file proposed in the consultation document has been pared back in favour of the less onerous SAT. 

The purpose of the SAT is to encourage taxpayers to undertake sufficient work to support transfer pricing policies and to enable HMRC to undertake high level quality assurance on the transfer pricing documentation produced. While this will not need to be filed, it should be in place to be provided on request alongside the UK local file.

What is not changing?

The Government notes that ‘almost all’ respondents to the consultation argued that an international dealings schedule (IDS) would require material investment on the part of taxpayers to compile from diverse sources the information that would comprise the IDS, and then to automate that process going forwards.

Respondents also argued that some of the information that would be included in the IDS may be identified from other sources already available to HMRC, such that the IDS could duplicate existing compliance requirements.

The Government appears to have listened and has taken the idea of an IDS off the table for now, being anxious to avoid the creation of additional administrative ‘burdens that [are] disproportionate to the compliance risks that [would be] addressed’ by the introduction of the IDS. However, the consultation makes it clear that the Government, ‘still believes that an IDS requirement could have significant benefits to both HMRC and [taxpayers] and will keep the issue under consideration for possible implementation in the future.’   

For more information, please get in touch with Suze McDonald, or your usual RSM contact.