UK transfer pricing documentation changes from 1 April 2023

UK businesses in scope of the new requirements are those with a taxable presence in the UK (e.g. through a UK company or permanent establishment) and are within the Country-by-Country Reporting regime (i.e. where they have global revenues of €750 million or more).

By way of background, transfer pricing is a means of pricing transactions between connected parties, based on the internationally recognised “arm’s length principle” which seeks to determine what the price would have been if the transactions had been carried out under comparable conditions by independent parties.

In recent years there have been significant developments in the field of international tax, spearheaded, in part, by the Organisation for Economic Cooperation and Development (OECD).

Action 13 of the OECD’s Base Erosion and Profit Shifting (BEPS) measures recognised the importance of a standardised approach to transfer pricing documentation. The standardised approach consists of:

  • a master file containing standardised information relevant for all multinational enterprise group members
  • a local file referring specifically to material transactions of the local taxpayer
  • a Country-by-Country report for the largest multinational enterprise groups containing aggregate data on the global allocation of income, profit, taxes paid and economic activity among the tax jurisdictions in which it operates

At the time of the OECD BEPS initiative, the UK implemented the Country-by-Country minimum standard but did not introduce specific requirements regarding master file and local file. HMRC instead relied on the need to keep and retain “sufficient records” to allow UK taxpayers to demonstrate that their tax returns are complete and accurate, including in respect of any figures affected by the transfer pricing rules.

However, the absence of specific transfer pricing documentation requirements, and supporting guidance, has created a degree of uncertainty for UK businesses regarding the appropriate transfer pricing documentation they need to keep, leading to inconsistency of approach, especially where their fellow group entities around the world had specific documentation requirements to adhere to.

UK law will now implement the additional recommendations of the BEPS Action 13 in respect of the master file and local file.

Additionally, the new regulations will also introduce a “summary audit trail” (SAT) requirement, where businesses must complete a questionnaire detailing the main actions they have taken in preparing the local file.

Of course, these additional documentation requirements, especially the SAT, will enable HMRC to capture even more data and place greater scrutiny on large UK businesses, ultimately increasing tax yields for the Treasury.

It is also important to note that revisions to UK law effectively lower the threshold whereby an error is deemed “careless” for the purposes of calculating penalties. The relevant taxpayer can only displace this 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.

There is therefore a very great need for UK entities in scope of the new rules to seek specialist transfer pricing advice, not only for their UK affairs but also across the globe. UHY International has dedicated transfer pricing specialists in many jurisdictions and can certainly offer assistance with your global requirements.

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