UK Consultation on Transfer Pricing Documentation

UK businesses are currently required to keep records needed to deliver correct and complete tax returns. However, HM Revenue & Customs (“HMRC”) does not require transfer pricing documentation to be in a specific format. From 23 March to 01 June 2021, HMRC consulted with the public on more specific UK transfer pricing documentation requirements.

Purpose

The UK government is proposing to introduce transfer pricing documentation requirements in line with the OECD standardised (Master File/Local File) approach. In addition, certain businesses may be required to report details of material intra-group cross-border transactions in an International Dealings Schedule (“IDS”).

A key objective of the consultation is to enable the UK government to find the right balance between the benefits and the potential additional burden on UK businesses.

Proposed changes

The UK government is seeking views on introducing a mandatory requirement for UK entities within CbCR groups to provide HMRC with a copy of a Master File upon request. The UK government’s view is that the majority of MNEs within the CbCR regime routinely create a Master File and that providing this to HMRC should not impose a significant additional burden. The consultation also considers whether the Master File requirement should be limited to MNEs within CbCR groups.

The UK government is also seeking views on introducing a requirement for MNEs to keep and produce a Local File upon request. It has been proposed that the Local File requirement would also apply to UK entities within a CbCR group. The UK government’s view is that UK entities which already keep sufficient records to demonstrate compliance would not need to keep additional records. However, the information would need to be summarised in a required manner. An additional evidence log could also be required to enable HMRC to distinguish between facts, technical analysis and opinion.

A requirement to file an annual IDS has also been proposed. The IDS would be used to collect data in a standardised format, which would enable HMRC to undertake a more data-driven risk assessment. Types of data and information that could potentially be reported include, but are not limited to, (i) the nature and the amount of transactions, (ii) details of financial dealings, (iii) payments of a non-financial nature, (iv) restructuring activity and (v) transfer pricing methodologies applied.

The consultation invites comments on topics such as appropriate timelines (e.g. 30 days to produce the Master File and Local File), materiality/de minimis thresholds, potential exemptions, filing requirements and taxpayers’ experiences of reporting requirements with other tax authorities. Comments are also invited on the extent to which relevant data and information can be sourced from current accounting/reporting systems, appropriate types of data/information to be requested and the anticipated administrative burden.

Survey

FTI Consulting conducted a survey in early May 2021 to solicit clients’ views before responding to the consultation.

Conclusion

Whilst the outcome of the consultation is some way off, we believe that it is highly likely that there will be some additional documentation requirements in the UK, although they may not require much more than the documentation that many groups already prepare voluntarily. Some form of an IDS is expected and will be an additional burden for many groups.

Read the WTS Global Transfer Pricing Newsletter here.