HMRC Consultation Outcome Transfer Pricing Documentation

Background

The government launched a consultation on ‘Transfer Pricing documentation’ on 23 March 2021 to explore 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 Co-operation and Development (‘OECD’) standardised approach. The consultation also discussed the possible introduction of an International Dealings Schedule to report intercompany transactions.

Executive summary

Outcome

• The government intends to consult on draft legislation in 2022 to require large businesses to maintain a master file and local file in line with OECD Base Erosion and Profit Shifting Action 13, and a supporting summary audit trail. 
• These changes are intended to take effect from April 2023.
• The government will not at this stage legislate or consult further at this time on any form of International Dealings Schedule. It is noted that the issue will be kept under review. 

Who does this effect?

• Multinational Enterprises (MNEs) within Country-by-Country Reporting (CbCR) groups i.e. consolidated group revenue exceeding €750m.

Next steps

• The government intends to consult on draft legislation in 2022 to introduce a requirement for the largest businesses to maintain, and provide on request, master file and local file documentation.
• Along with the legislation, guidance across multiple areas will also be issued to assist with implementation.

Details

OECD Master File and Local File

• The government will legislate in 2022 to require large businesses to maintain a master file and local file in line with OECD Base Erosion and Profit Shifting Action 13, and a supporting summary audit trail.
• The local file will need to be accompanied by a Summary Audit Trail (SAT). This could be considered a relaxation from the previously suggested evidence log.
  • The SAT will be a short, concise document summarising the work already undertaken by the customer in arriving at the conclusions in their transfer pricing documentation.
  • The SAT aims to encourage customers to undertake sufficient work to support transfer pricing policies and enable HMRC to undertake high level quality assurance on the transfer pricing documentation, without imposing a disproportionate burden on customers.
• These changes are intended to take effect from April 2023.
• The government will not at this stage legislate or consult further at this time on any form of International Dealings Schedule.
• Financial services was recognised as a sector were the IDS may be particularly challenging, given typically large volumes of transactions, and an example of where the administrative burden would be disproportionately high.
• It is noted that the issue will be kept under review. 

International Dealings Schedule (IDS)

• The government will not at this stage legislate or consult further at this time on any form of International Dealings Schedule.
• Financial services was recognised as a sector were the IDS may be particularly challenging, given typically large volumes of transactions, and an example of where the administrative burden would be disproportionately high.
• It is noted that the issue will be kept under review. 

Who does this effect?

• Multinational Enterprises (MNEs) within Country-by-Country Reporting (CbCR) groups i.e. consolidated group revenue exceeds €750m.
• No new documentation requirements will apply for businesses outside of the scope of CbCR.
• While the government will only mandate OECD format for larger groups, their response notes that OECD format is still considered best practice and is recommended for all business that are required to apply transfer pricing in the UK.

Guidance to be issued

• HMRC acknowledges that some MNE groups may not already prepare an OECD master file or local file, and that the SAT will be a brand-new requirement.
• Implementation guidance will be issued before these items are legislated, in order to assist business with understanding the new rules.
• Guidance will be issued on:
  • Transfer pricing documentation generally, e.g. to assist those that are not used to preparing OECD documentation.
  • Alignment with the new requirements with Annex II to Chapter V of the OECD Transfer Pricing Guidelines (setting out the content to be included within an OECD master file and local file).
  • The details to be included within the SAT.
  • How to determine what might be considered ‘material’ for clarity on what transactions need to be documented.