Transfer Pricing News Issue 40 - September 2022

HMRC releases draft legislation on transfer pricing documentation changes

The UK’s HMRC has released further details about the significant changes to UK transfer pricing law that will impact many large businesses from 2023. This is in the form of draft legislation and accompanying explanatory notes as part of the draft Finance Bill 2022/23. For the first time ever, the rules will require large multinationals in the UK -- those with global revenues exceeding EUR 750 million -- to maintain a master file, a local file and a summary audit trail for transfer pricing purposes.   


The Organisation for Economic Cooperation and Development (OECD) developed a raft of measures in 2015 in response to the G20/OECD Base Erosion and Profit and Shifting (BEPS) Action Plan, including a requirement to develop rules for transfer pricing documentation, resulting in the introduction of guidance on a standardised approach that outlined the following documentation requirements:

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

UK approach

Whilst the UK had already implemented the CbC report minimum standard, it did not explicitly require that all the OECD recommended transfer pricing documentation be kept. This situation created a degree of uncertainty for UK businesses regarding appropriate transfer pricing documentation and alignment with international best practice.

Following the recent consultation on transfer pricing documentation requirements, HMRC have published draft legislation intended to address this uncertainty. Further details as to how these changes will be implemented in practice are yet to be published. This is particularly important with regards to the summary audit trail (discussed below) which is a new concept that is not included in the OECD documentation recommendations and does not feature in the legal requirements of other countries.

What does the draft legislation mean for business?

The measures will apply to businesses with accounting periods commencing on or after 1 April 2023.  

Large multinationals will be required to prepare and maintain a master file and a local file in accordance with the OECD transfer pricing guidelines. These must be provided to HMRC within 30 days of a request.

The draft legislation also includes a requirement that certain taxpayers keep a summary audit trail. This is effectively a form of assurance that is expected to consist of a questionnaire and supporting evidence detailing the main actions taxpayers have taken in preparing the transfer pricing local file.

The draft legislation makes significant changes to HMRC’s information powers. The relevant transfer pricing documents can be requested outside an enquiry, that is, at any time. The rules also remove the requirement that the documents must be in the “possession or power” of the UK entity in question when they are in the “possession or power” of another person within the multinational group.

Documentation will need to be prepared ahead of filing the tax return. The draft legislation puts it beyond doubt that failure to maintain the relevant records or to produce the documentation upon request will lead to a presumption that a taxpayer has been “careless” for purposes of any tax penalty assessment imposed by HMRC.

BDO observations and key takeaways

HMRC continue to view transfer pricing as a key area of focus and are devoting considerable resources as part of their “resource to risk” compliance policy. Transfer pricing enquiries have resulted in the highest-ever yields for HMRC, increasing sharply to pass GBP 2 billion in 2020-2021 for the first time. 

Given the risk of tax-geared penalties, businesses that will be within the scope of the rules should consider undertaking a risk or gap analysis to ascertain how they will need to amend their compliance policies. In addition, taxpayers below the threshold should ensure that their documentation is OECD compliant, as that is HMRC’s general expectation and is envisaged by the current rules, even if they do not explicitly require a master file and a local file.

While the rules target large businesses initially, they are a clear indication of the shift in HMRC’s approach. The prescribed documentation requirements -- and perhaps more importantly, the requirement to maintain a summary audit trail -- represent the approach to transfer pricing compliance and documentation that HMRC now expect. They also provide valuable insight into the likely attitude towards penalties for all taxpayers who are not able to demonstrate a sufficient level of diligence in dealing with and implementing their transfer pricing policies.

Ken Almand

Tine Muvombo

Vladimir Milic