HMRC released a public consultation document on 23 March 2021 setting out some proposed changes to UK transfer pricing documentation requirements. The objectives of the proposed changes would be to:
- provide greater certainty for UK businesses around documentation requirements for transfer pricing;
- provide HMRC with better quality data to enable more efficient and targeted compliance interventions; and
- align the UK’s practice more closely with the documentation requirements of other jurisdictions and with the BEPS Action 13 Report.
Two main changes are being considered:
- The introduction of mandatory Master File and Local File requirements (in line with the BEPS Action 13 Report) for UK multinational enterprises (MNEs) within the scope of Country by Country (CbC) reporting requirements; and
- The introduction of additional disclosures about cross border transactions with associated enterprises to be included in an International Dealings Schedule (IDS) as part of the annual tax return for all businesses within the scope of UK transfer pricing rules.
These proposals could substantially increase the obligations for many UK taxpayers, and HMRC has invited contributions from businesses, advisers and representative bodies on “possible options and design ideas which could benefit UK business and HMRC”. The consultation period is relatively short, running for 10 weeks with a deadline of 1 June 2021.
Introduction of master file and local file requirements
Whilst HMRC’s current guidance references the BEPS Action 13 Report as an example of a standardised approach to TP documentation, and this is generally considered a best practice approach to TP documentation in the UK, there is no formal requirement to prepare TP documentation in this format at present.
The consultation document considers the introduction of a mandatory requirement for UK MNEs within a CbC reporting group (i.e. a group with consolidated group revenues over EUR 750m) to prepare a Group Master File and UK Local File, which would need to be provided to HMRC within 30 days after a request.
The consultation also discusses potential additional requirements, such as an ‘evidence log’ which could be included as an appendix to the local file to support the key facts on which the TP policies are based. Reference is made to the Profit Diversion Compliance Facility (PDCF) guidance which includes an example evidence log.
International Dealings Schedule
The introduction of an IDS would be used to report transactional data about intragroup cross border transactions to HMRC in a structured format which could be used for HMRC’s risk assessment purposes, enabling them to more accurately identify transfer pricing risks.
All UK businesses within the scope of UK transfer pricing legislation would be required to file an IDS under the current proposal, with potential materiality limits being considered to exclude certain transactions and reduce the potential administrative burden.
The consultation document includes the following types of information that could be within the scope of reporting via an IDS:
- The nature and amount of specific types of transactions
- Details of financial dealings
- Compensation, receipts or payments of a non-financial nature
- Information on restructuring activity
- Information on the TP methodologies applied
- Information on the level and type of supporting documentation for the TP methodology selected and applied
- Counterparty details for transactions including identity and country location
- Information on activities
- Corporate group information (to enable entity level data to be combined and attributed to a particular MNE group)
To date, the UK’s approach to transfer pricing documentation has been to rely on general requirements for taxpayers to support the completeness and accuracy of their tax returns. Some guidance on expectations has been included in HMRC Manuals for many years but this guidance is limited and broad in nature, outlining a need to be able to produce “evidence” to support compliance with arm’s length requirements.
With the release of this consultation, HMRC has given a clear indication that the future of UK transfer pricing documentation is likely to be far more structured and detailed. The possible introduction of BEPS Action 13 Master File and Local File requirements would more closely align the UK with many other jurisdictions. The potential addition of the “evidence log” and IDS could take the UK to the more complex end of the global compliance spectrum for transfer pricing documentation.
The initial consultation period is relatively short but provides businesses and other interested parties with the opportunity to influence the degree of change and the extent to which that change increases the burden on UK taxpayers for years to come.
For further information, please get in touch with your usual PwC transfer pricing contact.