Outcome of government consultation on transfer pricing announced
Following the recent public consultation on transfer pricing documentation, the UK government announced on 30 November 2021 that it intends to introduce legislation that would require the largest companies (i.e., those meeting the requirement for country-by-country reporting) to maintain, and provide upon request, master file and local file documentation (for coverage of the consultation, see the article in the August 2021 issue of Transfer Pricing News and for the summary of responses to the consultation, click here). This would be the first time that transfer pricing documentation in a prescribed format (i.e., following the OECD transfer pricing guidelines) would be legally mandatory in the UK.
The consultation, launched on 23 March 2021, explored whether master file and local file documentation requirements should apply to the largest businesses with a presence in the UK, as well as whether an International Dealings Schedule (IDS) should be introduced for all customers required to apply UK transfer pricing rules to report data about cross-border transfer pricing transactions.
Master and local files
The government specifically acknowledges that the master file and local file approach is representative of “best practice” transfer pricing documentation, and it intends to encourage all taxpayers that are required to apply transfer pricing to take this approach to documentation. The only conclusion to be drawn from this is that the OECD transfer pricing documentation format should be considered a best practice in all but a narrow set of circumstances.
Where the UK tax authorities (HMRC) request the master and local files, the new UK approach would give the taxpayer 30 days to submit the documentation; the government expects that the files “would be required to be prepared routinely in support of customers’ filed transfer pricing positions.” One reason for this approach clearly is to encourage taxpayers to prepare and maintain appropriate contemporaneous documentation.
In a welcome response to comments made during the consultation, the government intends to introduce a “reporting threshold” to exclude international related party transactions that are immaterial. It will publish “clear guidance” on this point, with “practical examples as well as key principles to help guide customers in borderline cases.” In all but those cases where there is a “material UK tax risk” it will not be necessary to include UK:UK transactions in the master and local files. It follows that, where a taxpayer self-assesses that all of its international related party transactions are immaterial, it will not be required to complete a local file or make an annual declaration. However, in such cases, the taxpayer will be expected to keep records of any analysis undertaken to support the self-assessed position, and to provide that analysis upon request within the same 30-day time period as for documentation. This is a simplification measure that eases the compliance burden of many taxpayers.
Related party transactions/dealings reporting
The government will not implement or consult further on the introduction of an IDS at the present time, but it will keep the issue under review “in view of the potential benefits to both HMRC and customers.” Any future consultation will focus on how to achieve the right balance between costs and administrative burdens for customers and the benefits in terms of improved compliance. The prospect of an IDS has clearly not gone away, and we think that it is sensible to assume that something of this nature will find its way into UK law at some point in the not-too-distant future. Therefore, IDS will continue to be a factor that businesses will need to consider when upgrading their existing reporting systems.
Simpler evidence logging
The government has also decided not to include a requirement for a detailed evidence log in the UK local files as originally proposed, but it does intend to include a more limited requirement in the form of a Summary Audit Trail (SAT). This new legislative requirement will be accompanied by supporting guidance.
It is expected that the SAT will be a short, concise document summarising the work already undertaken by the taxpayer in arriving at the conclusions in its transfer pricing documentation. The SAT is intended to:
- Encourage businesses to “undertake sufficient work to support transfer pricing policies;” and
- Enable HMRC to “undertake high level quality assurance on the transfer pricing documentation” with a view to providing a better focus on higher risk areas during enquiries.
The introduction of the SAT reflects the overall direction of HMRC’s compliance strategy already seen in UK reporting obligations, such as the Senior Accounting Officer rules. It is clear the SAT will draw upon lessons learnt from the operation of the Profit Diversion Compliance Facility and is designed to encourage more thorough risk assessment.