UK transfer pricing documentation changes: draft legislation

HMRC has published draft legislation and explanatory notes in relation to the changes to transfer pricing documentation requirements to be introduced in the UK from April 2023.

The measure will require large multinational businesses operating in the UK to maintain a master file and a local file in a prescribed and standardised format, as set out in the OECD’s transfer pricing guidelines. It will also introduce a requirement to complete a Summary Audit Trail, which is a questionnaire detailing the main actions undertaken in preparing the local file.

The businesses in scope of the measure will be those with a taxable presence in the UK (through a UK resident company or permanent establishment) which are within the Country-by-Country Reporting regime (have global revenues of €750m or more).

Background

At present, UK documentation requirements simply require businesses to keep and retain sufficient records to demonstrate that their tax returns are complete and accurate, including those aspects relating to transfer pricing. There is no specific requirement to produce and retain a particular format of transfer pricing documentation (although UK transfer pricing legislation incorporates the OECD Guidelines and therefore implies businesses should consider documentation which is consistent with the OECD Guidelines' recommendations).

In 2015, the OECD's BEPS Action 13 Report "Guidance on Transfer Pricing Documentation and Country-by-Country Reporting" required the introduction of country by country reporting (which was introduced in the UK) and also recommended standard documentation requirements, including adoption of a Master and Local File approach. The OECD standardised approach consists of (i) a Master File containing standardised information relevant for all MNE group members; (ii) a Local File referring specifically to material transactions of the local taxpayer; and (iii) a CbC report for the largest MNE groups containing aggregate data on the global allocation of income, profit, taxes paid and economic activity among the tax jurisdictions in which it operates.

The UK did not introduce the standardised approach to transfer pricing documentation because it believed the UK already had broad record keeping requirements, but since 2015 many other countries have adopted the Master and Local File requirements into local legislation recommended by the OECD.

As a result, the government consulted on the possibility of bringing in this widely adopted international approach in the UK. A consultation document entitled "Transfer Pricing Documentation" was published in March 2021 and a response document followed in December 2021 which confirmed that legislation would be introduced to require the largest companies to maintain a master file and local file documentation. However, the government decided not take forward a proposal to introduce a requirement for business to prepare an International Dealings Schedule for the time being.

Proposed changes

The government has now published draft legislation and explanatory notes as part of the draft Finance Bill legislation published on 20 July 2022.

The draft legislation will introduce powers in the Taxes Management Act and Finance Act 1998 to allow the government to bring forward regulations to specify transfer pricing records which must be kept and preserved. The explanatory notes confirm that these powers will be used to make regulations that will introduce a requirement for large multinational businesses operating in the UK to keep and preserve a master file and a local file in a prescribed and standardised format, as set out in the OECD's Transfer Pricing Guidelines (TPG). It also proposes to use the power to introduce a requirement to complete a Summary Audit Trail, a questionnaire detailing the main actions undertaken in preparing the local file.

It is intended that this clause and the proposed regulations will take effect from April 2023.

Changes are also to be made to Finance Act 2008 schedule 36 to ensure that an information notice can require production of transfer pricing information or other documents referenced in the regulations, as well as the means by which, and the form in which, these are provided. Changes will also been made to ensure that the relevant transfer pricing documents can be requested outside 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 multi-national group.

Finally, revisions are being made to Finance Act 2007 schedule 24 to make clear that failures to do the work necessary to maintain the relevant records or to produce those records on request will lead to the presumption that an inaccuracy is careless. A taxpayer can only displace this presumption by providing the documents and evidencing the underlying transfer pricing information had been prepared in advance of filing their corporation tax return, or otherwise showing they took reasonable care.

Comment

Transfer pricing compliance remains high on HMRC’s agenda with an increasing focus on intra-group transactions. As such, businesses should pay careful attention to the new requirements and ensure that they are well prepared for their introduction in April 2023, particularly given the revisions to the legislation on the applicability of penalties relating to transfer pricing documentation.

The UK specific element of the new requirements will be the Summary Audit Trail. At present there is little detail as to the exact form of this new requirement but it is to be hoped that HMRC will publish more details shortly along with the expected draft HMRC guidance on the new documentation requirements as a whole.