Transfer Pricing News Issue 41 - December 2022

Transfer pricing documentation requirements changes closer to becoming reality

The UK is implementing changes to its transfer pricing documentation requirements. These changes will take effect for accounting periods beginning on or after 1 April 2023. For the first time, there will be mandatory documentation requirements in the UK. (For prior coverage, see BDO’s Transfer Pricing News issue 40),

Whilst the rules are mandatory for taxpayers that exceed the threshold, HMRC also have an expectation that smaller businesses will compile documentation that accords with OECD recommendations even if not explicitly obliged to do so by the statute.

Changes to the rules

Currently, the UK transfer pricing rules don’t explicitly require OECD local files and master files, but require simply that sufficient documentation be in place to demonstrate that a tax return is correct and complete. In practice, however, HMRC has stated that for companies with a material UK presence they regard the filing of a local file and a master file to be a best practice.

The new rules introduce two changes to the documentation requirements:

  1. OECD local file and master file will become a required format for transfer pricing documentation.
  2. There is a proposal that groups must prepare a “summary audit trail” that will sit alongside the UK local file. HMRC was due to issue a consultation on the issue in November, but it has yet to be published and it is unclear when the measure will be introduced. It seems likely that the consultation will still take place at some time in 2023. What we understand at present is as follows:
    1. This will be a short questionnaire – currently two pages in draft form – that summarises the work undertaken by the taxpayer in reaching the conclusions set out in the local file.
    2. The current draft version of this questionnaire broadly requires ‘yes’ or ‘no’ answers, but with the option for more detailed responses, if necessary.
    3. The key theme in the questionnaire is the requirement for up-to-date documentation, and the taxpayer will be required to certify that the necessary transfer pricing documentation has been prepared and then kept continuously up-to-date according to changes to the business.

These changes apply to all companies with group revenue exceeding consolidated group revenue of EUR 750 million, the same threshold as for country-by-country reporting.

What should businesses be doing?

This change in legislation forms part of a broader pattern of increasing interest and scrutiny in transfer pricing. It signals to taxpayers, and to large groups in particular, that they will likely be subject to increasing scrutiny, and higher expectations, in how they support, document and implement their transfer pricing policies. This is especially seen through the introduction of the summary audit trail. This increasing focus and clarity over what is expected regarding operational transfer pricing may have the effect of lowering the threshold of what constitutes “carelessness” for purposes of calculating penalties in the event of an adjustment.

In the first instance, businesses should consider whether they have documentation prepared in the OECD format (and when it was last prepared). They should also review their other documentation --whether they have pricing support and benchmarking (and whether it is more or less than three years old), whether they have robust transfer pricing policy documents in place and when these policies were last considered, and whether the group is confident they have the right processes in place to manage and implement their policies correctly. They also need to undertake a gap analysis to ascertain whether they have the correct policies and procedures in place to be able to complete the summary audit trail.

Anton Hume

Hal Dunnett

Ken Almand