What was the outcome from HMRC’s transfer pricing consultation?
In the Spring Budget there were a number of consultations laid out by HMRC and one of them was to seek views on options for updating the UK’s current transfer pricing documentation requirements. These consultations ran from 23 March to 1 June 2021, and HMRC released the summary of responses on 30 November 2021.
What did the consultation cover?
The consultation explored two main areas:
- The introduction of a requirement for UK groups within the scope of transfer pricing to keep, and produce upon request, specific documentation to convey and support the transfer pricing positions adopted in their tax returns in line with the OECD standardised approach; and
- Whether to require certain groups to include with their annual tax return, details about material cross border transactions with connected parties (“International Dealings Schedules”).
In the main, HMRC have taken a pragmatic approach to the changes which are due to come into force from April 2023. The government intends to introduce a requirement for businesses to maintain, and provide on request, master file and local file documentation. The requirement will apply to groups subject to country-by-country reporting requirements e.g. multinationals with annual turnover of €750 million or more.
1. Transfer Pricing documentation
The consultation also intimated the introduction of an ‘evidence log’ as part of the local file to set out key facts and evidence upon which technical opinions are based. But there were concerns that this would put an undue burden on businesses. This has been dropped by HMRC as the existing use of evidence logs as part of the Profit Diversion Compliance Facility is focused on specific high-risk transactions is already in place.
However, it is intended that a short summary audit trail will be required to outline the work undertaken by the business in arriving at transfer pricing conclusions. Most transfer pricing documentation already includes this, which should mean little extra work is required.
As mentioned, the Transfer Pricing master and local documentation will need to be maintained and provided to HMRC on request. If HMRC request the documentation, businesses will have 30 days to produce master and local files. This means that all transfer pricing documentation will need to be completed fully prior to computations being submitted.
2. International dealings schedule
The consultation also considered the introduction of an ‘international dealings schedule’ to report transactional data in a structured format that HMRC could analyse as part of a risk assessment. Again, many businesses voiced concerned about the additional costs and compliance compared to the expected benefits. A significant amount of investment would be needed to automate reporting processes, not to mention the man hours involved.
The Government listened to those concerns and have decided not to implement, or consult further on, an international dealings schedule, although it will be kept under review. This is undoubtedly good news for businesses in the process of recovering from the pandemic.
The government will publish draft legislation on the introduction of master file and local file documentation, including a summary audit trail, in 2022 with a view that the new documentation requirements take effect from April 2023.