Transfer pricing has historically been driven to a significant extent by compliance requirements. As documentation requirements have increased globally, multinational groups have invested significant time and resources in developing transfer pricing policies, preparing documentation and supporting their positions through benchmarking analyses.

Historically, compliance obligations have often focused on establishing and documenting an arm's length policy rather than demonstrating how that policy is implemented on a day-to-day basis. In fact, not all multinational groups had formal transfer pricing policies 10 or 15 years ago, and much of the profession's focus has rightly been on helping businesses establish robust frameworks and meet increasing compliance obligations.

Compliance requirements are evolving. Tax authorities increasingly seek structured data, transactional information and quantitative disclosures alongside traditional transfer pricing documentation.

As a result, tax authorities have greater visibility over both the transfer pricing policy a business has adopted and the financial outcomes it has produced.

How the UK’s ICTS is changing transfer pricing compliance

The UK's forthcoming International controlled transactions schedule (ICTS) brings these issues into greater focus. Under the proposed rules, businesses within scope would be required to report specified information on relevant cross-border controlled transactions to HMRC in a standardised format. It is intended to apply for accounting periods beginning on or after 1 January 2027, with the detailed requirements subject to implementing regulations.

This represents an important development for UK transfer pricing compliance. Historically, much of the detailed explanation of a group's transfer pricing arrangements has sat within supporting documentation that is not generally submitted to HMRC unless specifically requested. ICTS would result in considerably more information about the transactions themselves, and the methodologies applied, being submitted to HMRC as part of the annual tax compliance process.

With ICTS intended to support HMRC's increasingly data-led approach to transfer pricing assessment, this raises a practical question: is having an appropriate transfer pricing policy and supporting documentation still enough?

For many businesses, the ICTS will require greater discipline around transfer pricing implementation and record keeping. It may also require closer co-operation between the tax teams responsible for transfer pricing policies and the finance teams responsible for implementing them.

And this is where operational transfer pricing (OTP) becomes particularly relevant.

What is operational transfer pricing and how does it apply?

Put simply, OTP is the link between the transfer pricing policy and what happens in the accounts.

A transfer pricing policy may state that a distributor should earn a routine return, a service provider should achieve a target margin, or a royalty should be calculated according to a particular methodology. The policy is only the starting point. Businesses still need to determine how those arrangements are translated into invoices and accounting entries. They must also monitor actual results against the policy, identify and address deviations and determine how year-end adjustments should be calculated and recorded.

OTP brings those activities together through governance, clearly defined responsibilities, repeatable processes and, where appropriate, technology.

Operational transfer pricing does not have to mean major technology investment

One barrier to OTP is the perception that it involves significant investment. It can sometimes be associated with extensive enterprise resource planning (ERP) reviews, sophisticated tax technology and large-scale transformation programmes. The prospect of significant implementation costs can understandably make businesses hesitant to engage with OTP. Particularly where the immediate compliance requirement does not appeared to justify that investment.

But OTP does not have to begin with technology.

For many businesses, the first step is establishing an effective governance framework. This might include defining ownership of different stages of the transfer pricing process. It could also involve setting out how and when results should be monitored, agreeing how deviations and adjustments should be addressed and improving communication between tax and finance teams. The arrangements should be documented in practical governance manuals.

Technology can then be used to support and automate those processes where transaction volumes, complexity or the wider business case justify it. It should be an enabler of a well-designed process rather than necessarily the starting point.

Why ICTS puts operational transfer pricing higher up the agenda

Compliance requirements have historically been an important driver of investment in transfer pricing policies, documentation and benchmarking. As compliance obligations becomes more data-led, it may now also drive greater investment in the operational processes sitting behind those policies.

For businesses preparing for ICTS, that does not necessarily mean implementing new systems. It means considering whether the existing transfer pricing framework can reliably produce the information and outcomes that will ultimately be reported to HMRC.

That includes understanding how controlled transactions are identified and recorded, how methodologies are implemented and whether actual results are monitored against the intended policy. It also includes understanding how adjustments are calculated and recorded, as well as how tax and finance teams work together throughout the process.

The forthcoming introduction of ICTS means those practical considerations are becoming increasingly relevant in the UK. Perhaps, then, the question for businesses with a presence in the UK is moving beyond whether they have an appropriate transfer pricing policy and towards whether their processes, records and financial results demonstrate that the policy is working as intended.

If you would like to discuss the practical implications of ICTS or learn from the experience of jurisdictions that have already introduced more detailed transfer pricing reporting requirements, please contact Simon Taylor or your usual RSM adviser.

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