HMRC publish draft TP Regulations

As an early Christmas present, HMRC published for consultation on 22 December draft regulations for the implementation of changes to the UK’s transfer pricing documentation requirements. The draft Transfer Pricing Regulations 2023 require large MNEs to retain a Master File and Local File in line with the OECD Transfer Pricing guidelines.

The draft regulations, which are open for consultation until the end of January 2023, leave open the possibility that HMRC may introduce further requirements for supplementary information related to the Local File to be prepared in the future. A consultation on this aspect is expected to take place in 2023.

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.

In March 2021, the government consulted on the possibility of bringing in this widely adopted international approach in the UK 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. Instead, HMRC suggested that a Summary Audit Trail (SAT) requirement may be included (essentially requiring supporting evidence for the preparation of the local file). Draft enabling legislation was published in July 2022, including changes to the relevant penalty provisions. The Autumn Statement in November 2022 confirmed that whilst the rules would be introduced with effect from April 2023, the initial phase would not include a requirement to produce a Summary Audit Trail.

The draft Transfer Pricing Regulations 2023

The draft Transfer Pricing Regulations 2023 have now been released for consultation.

The draft regulations require MNEs with turnover of €750m or more, operating in the UK, to keep and preserve a master file and local file in accordance with the OECD Transfer Pricing Guidelines.

The regulations will have effect:

• for corporation tax purposes, in relation to accounting periods beginning on or after 1 April 2023
• for Income Tax purposes, in relation to the tax year 2024/2025 and subsequent years.

Regulation 3(4) of the draft statutory instrument provides HMRC with the power to introduce, by way of a published notice, the requirement for MNEs to produce a SAT. As previously indicated at the time of the Autumn Statement, HMRC will undertake a separate public consultation on the SAT in 2023 and therefore the SAT requirement will not come into force on 1 April 2023. A decision on the SAT’s commencement will be made following the conclusion of the future public consultation.

Comment

The draft regulations are open for consultation responses until 31 January 2023 and responses should be sent to transferpricingdocumentationconsultations@hmrc.gov.uk.

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 announced in July 2022 (see our earlier article here).

There will be some relief that the initial phase does not go beyond the OECD transfer pricing documentation requirements. However, HMRC has retained powers to introduce separate UK specific elements, such as the possible SAT requirement, and it will be important for affected businesses to monitor the consultation on these aspects in 2023.