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 (those with global revenues exceeding EUR 750 million) to maintain a master file, local file and summary audit trail in the UK for transfer pricing purposes.
Background
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 including the following documentation:
- A Master File containing standardised information relevant for all multinational enterprise group members
- A Local File referring specifically to material transactions of the local taxpayer
- A Country-by-Country report for the largest multinational enterprise 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
While the UK implemented the Country-by-Country 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 which is intended to address this uncertainty although further details on how these changes will be implemented in practice are yet to be published. This is particularly important with regards to the summary audit trail (see below) which is a new concept and 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 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 to keep a summary audit trail. This is effectively a form of assurance which 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 provides significant changes to HMRC’s information powers. The relevant transfer pricing documents can be requested outside an enquiry – i.e. at any time. The rules also remove the requirement for the documents to have to 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 multi-national group.
The 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 on request will lead to the presumption that a taxpayer has been ‘careless’ for the 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 who will be within the scope of the rules should be considering undertaking a risk or gap analysis to ascertain how they will need to amend their compliance policies. In addition, taxpayers below the revenue threshold should still ensure that their documentation is OECD compliant as that is the general expectation of HMRC and is envisaged by the current rules, even if they do not explicitly require a master and local file.
While the rules are targeting large businesses initially, they are a clear indication of the shift in approach from HMRC. The prescribed documentation and perhaps more importantly the requirements to maintain a summary audit trail represent the approach to TP 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 and implementing their transfer pricing policies.
If you have any questions or would like to talk through anything mentioned in the above article, contact a member of our tax team Claire McGuigan or Karen Doherty.