HMRC have published the findings and next steps of their consultation on transfer pricing documentation. Kirsty Rockall looks at their conclusions.
In March 2021 HMRC launched a consultation on transfer pricing documentation. The consultation explored whether the largest businesses with a presence in the UK should be required to maintain, and produce upon request, Master File and Local File documentation per the Organisation for Economic Cooperation and Development (OECD) standardised approach. Furthermore, HMRC explored the idea of introducing an International Dealings Schedule (IDS) for all customers required to apply UK transfer pricing rules to report data about cross border transfer pricing transactions.
As part of the ten-week consultation, HMRC held nine meetings and received 39 written responses, including a response from our own transfer pricing team. The findings and next steps were published on 30 November 2021.
These are the key points you need to understand.
large businesses will be required to maintain a Master File and Local File, and a supporting summary audit trail (SAT)
the government will not introduce an IDS but will keep it under review
the definition of ‘large’ will align to the Country-by-Country Reporting (CbCR) threshold: ie, multinational groups with annual consolidated revenue in the immediately preceding period of equal to or more than EUR 750 million are considered ‘large’
HMRC have decided not to include a requirement for a detailed evidence log in UK local files. However, they do intend to include a more limited requirement in the form of a SAT. In practise the SAT will be a short concise document summarising the work already undertaken by the group in arriving at the conclusions in their transfer pricing documentation. This will be an additional legislative requirement which will be accompanied by supporting guidance
content for the Master file and Local file will be closely aligned to the OECD standard which is used internationally
HMRC confirms the 30-day timescale for the provision of the Master File, Local File and SAT following request. The purpose of the Master File and Local File is to support the transfer pricing policies underlying the filed corporate tax return, and therefore should be prepared in advance of the annual filing
where a group self-assesses that all of its international related party transactions are immaterial (not yet defined), HMRC does not intend to require it to complete a Local File or make an annual declaration. Instead HMRC expects such groups to keep a record of any analysis undertaken to support that self-assessed position and provide that analysis upon request, within the same 30-day time scale as for documentation
HMRC intends to consult on draft legislation in 2022, with the new rules to take effect from April 2023.
What do these 'next steps' mean for you?
For many groups this will not constitute a departure from the documentation they are already producing, however it will formally bring the UK transfer pricing documentation requirements in line with those set out in the OECD guidelines.
Currently, unless a group is covered by the UK’s Small and Medium Enterprise exemption, then profits or losses should be calculated with reference to the arm’s length principle. Records and evidence are required to be kept in order to demonstrate to HMRC that the results of transactions with related businesses are determined with reference to the UK’s transfer pricing rules and the application of the arm’s length principle. Transfer pricing documentation should be proportionate to the nature, size and complexity of a group’s business and consist of information and records relating to a period covered by the tax return.
In reality since the publication of the BEPS Action 13 report and the updated OECD guidelines, more and more groups have been using the OECD Local File and Master File templates to prepare their transfer pricing documentation – whether they cross the EUR 750 million threshold or not.
What are the benefits of using these templates?
The benefits, to date, of using these templates have been:
penalty protection - where transfer pricing documentation is absent, HMRC is likely to levy penalties for careless behaviour. HMRC is used to seeing the layout of the Local File and Master File templates and so is familiar with their content
tax governance and control - transfer pricing is on the internal audit and board agenda more than ever. Transfer pricing documentation is a key part of a company being able to sign off an unqualified SAO certificate in each period
external audits – in many jurisdictions, external auditors will request to see transfer pricing documentation when signing off financial statements. Having robust documentation will assist with the year-end process
clean exits – having robust existing transfer pricing documentation can save a target or vendor’s management time and help to limit price chips.
Regardless of the conclusions that a Local File style of documentation will continue to be prepared by UK groups that exceed the medium enterprise thresholds, but are below the EUR 750 million threshold due to the expectation from overseas jurisdictions and the simplicity of following a well-trodden path.
The materiality threshold is an interesting quirk introduced by HMRC. This threshold covers both UK-UK and cross-border transactions. If transactions are considered immaterial from a UK tax risk perspective, then they can be excluded from the transfer pricing documentation. This does not however mean that they can be priced on a non-arm’s length basis.
New guidance and legislation is forthcoming on the new ‘summary audit trail’ requirements. HMRC has indicated that the requirements will be a ‘short, concise document’ setting out the work that the business has undertaken in arriving at the conclusions in the Local File/Master File documentation. The twin objectives of the SAT are to increase transparency over how a business has conducted its transfer pricing analysis in order to encourage compliance, and allowing HMRC to assess the level of assurance the documentation provides to focus enquiries on higher risk areas. The implication is that this requirement will apply to those groups that breach the EUR 750 million threshold.
Further consultation will be held on the draft legislation in 2022, with guidance to be released on the preparation of the documentation and SAT.