Is transfer pricing documentation about to become more taxing?
Many of you will have heard the term “BEPS” thrown around by now and for good reason. The Base Erosion and Profit Shifting action plan was introduced over five years ago by the Organisation for Co-operation and Development (OECD). In particular, Action 13 set out a proposed new three tier global standard for transfer pricing documentation; specifically: a country-by-country (“CbC”) report, a master file and a local file.
CbC reporting became mandatory for all multinational enterprises (“MNEs”) when the UK enacted the OECD recommendation into legislation in 2015. This applies to MNEs with consolidated group revenue of €750m or more for accounting periods starting on or after 1 January 2016. However the concept of the master file and local file recommended under the BEPS Action 13 final report, were never legislated.
The UK government is now running a consultation with the intention of updating and strengthening the current UK transfer pricing requirements for MNEs, with the aim of:
- Providing greater certainty for UK businesses;
- Providing HMRC with better quality data; and
- Better aligning UK transfer pricing requirements with comparable tax administrations overseas and the recommendations of the BEPS Action 13 final report.
HMRC purport that the additional £6bn of tax generated from transfer pricing compliance activities in the last five years is evidence that transfer pricing continues to be a major source of tax uncertainty for large UK businesses and a significant tax risk area for HMRC. The Government is therefore proposing to introduce 2 new key requirements as set out below:
1. Documentation and submission
MNEs within the scope of CbC reporting must provide a master file and UK local file, prepared in accordance with the OECD recommendations, to HMRC within 30 days of them being requested. The OECD standardised documentation format is believed to be a means of improving the efficiency of HMRC transfer pricing risk assessments and enquiries.
As support for the information provided in the local file, the consultation is also seeking comment on the introduction of a new requirement, described as an “evidence log”.
HMRC indicates that this document would better highlight the underlying facts from any technical opinion put forward by the preparer. The view is that this should reduce the fact-finding time during the early stages of a transfer pricing enquiry.
2. International dealings schedule
The Government is also considering the introduction of a new requirement for all businesses within the scope of UK transfer pricing legislation to submit an international dealings schedule (“IDS”). The consultation foreword says that an IDS is already required by several other tax jurisdictions and intimates that an IDS in the UK would provide HMRC with increased visibility of intragroup cross-border transactions which will aid more focused enquiries.
The consultation lists the types of information that may be reported in an IDS, and includes:
- The nature and amount of specific types of transactions;
- Details of financial dealings;
- Compensation, receipts or payments of a non-financial nature;
- Information on restructuring activity;
- Information on the transfer pricing methodologies applied;
- Information on the level and type of supporting documentation for the transfer pricing methodology selected and applied;
- Counterparty details for transactions including identity and country location;
- Information on activities; and
- Corporate group information.
The consultation closed on 1 June 2021, and therefore it is still too early for the Government to publish its response. However, we can expect that the results of the consultation documents will lead to an expansion of the UK’s transfer pricing documentation requirements and potential filing requirements.
We recommend that businesses review their existing transfer pricing documentation as well as their record keeping now to determine whether any improvements need to be made.