L Day: Operative date for new UK transfer pricing documentation rules confirmed

New rules for large companies take effect for accounting periods commencing on or after 1 April 2023. Here’s what multinationals need to do.

New rules for large companies take effect for accounting periods commencing on

On 20 July the UK Government published draft clauses for the next Finance Bill which, as expected, confirm that UK members of large groups will be mandated to maintain transfer pricing documentation in a prescribed form. Large groups for these purposes are those which are subject to Country by Country Reporting requirements, broadly those with annual global consolidated revenues of at least €750 million. Here’s what multinationals need to do.

What do we know about the new requirements?

  • The new documentation requirements will apply for accounting periods commencing on or after 1 April 2023.
  • The documentation requirements will be implemented via regulations (i.e. a Statutory Instrument) which will specify that Master File, Local File and Summary Audit Trail documents must be kept and provided to HMRC on request within 30 days.
  • The Master File and Local File will need to contain all the information set out in Annexes I and II to Chapter V of the OECD Transfer Pricing Guidelines.
  • The documentation should be prepared in advance of a company filing its UK corporation tax return and this point is to be reinforced by changes to the legislation on penalties in Schedule 24 to Finance Act 2007.
  • The draft Finance Bill clauses also include changes to HMRC information powers specifically in relation to obtaining transfer pricing related records (which will be defined in the regulations to be laid). Changes are to be made to ensure that the relevant transfer pricing documents can be requested outside of an enquiry and to 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 multinational group.
  • The unique element of the requirements is the Summary Audit Trail, which will be a questionnaire detailing the main actions taken in preparing the transfer pricing local file document.  There is a lot of interest about what this will entail and we are expecting a working draft of this to be published in August or September 2022 for consultation along with draft HMRC guidance on the new documentation requirements.

Why is this important?

Transfer pricing compliance continues to be high on HMRC’s agenda and there is no sign of this abating given HMRC published statistics showing a record transfer pricing yield of £2.1 billion in FY20/21.

HMRC are increasingly considering the evidence supporting the statements made in taxpayers transfer pricing documentation, particularly the functional analysis.  Our understanding is that the Summary Audit Trail is intended to help HMRC better understand the specific actions large businesses are taking to satisfy themselves that their transfer pricing arrangements meet the arm’s length standard on an annual basis.

HMRC will seek to impose penalties for failure to take reasonable care where a determination is made that a transfer pricing adjustment is required and either: (i) no transfer pricing documentation existed at the time the relevant corporation tax return was filed; or (ii) the documentation is found to contain material inaccuracies or omissions due to failure to take reasonable care.  Failure to implement transfer pricing policies properly may also lead to penalties which is why operational transfer pricing is a key area of focus for many large businesses.

What should multinationals be doing to prepare?

The best defence against a transfer pricing adjustment, and potential penalties, is to prepare robust transfer pricing documentation on an annual basis which is supported by relevant up-to-date evidence and which contains all the information prescribed for a Master File and Local File in the OECD Transfer Pricing Guidelines.

Groups who are currently below the €750 million revenue threshold for the new documentation requirements, particularly those within the scope of the Senior Accounting Officer rules, should also take note of the standards being mandated by HMRC for the largest businesses given the changing environment around transfer pricing compliance.

Before the rules enter into force, multinational groups can prepare by:

  • Identifying material cross border intercompany transactions involving UK taxable persons which will need transfer pricing documentation and establish the quantum of those transactions;
  • Establish what existing transfer pricing documentation exists which explains the transfer pricing policies which are applied to these transactions and why those policies were selected;
  • Refresh the functional analysis for those transactions – it is likely the Summary Audit Trail will include questions around when a full functional analysis was last undertaken and it will be important to consider how you would demonstrate to HMRC that the underlying facts have not changed if relying on a previous analysis;
  • Consider recent changes to the OECD Transfer Pricing Guidelines (e.g. accurate delineation of transactions and control of risk, revised profit split guidance and the new guidance for financial transactions) and whether your transfer pricing policies are potentially impacted by these changes;
  • Identify areas or transactions for which access to relevant and qualitative data for transfer pricing documentation or implementation purposes may prove challenging, and anticipate appropriately (e.g. through data quality assessment, refreshed governance); and
  • Overall, assess the effectiveness of your operational transfer pricing and documentation strategy and processes, and consider the benefits of technology enablement.

Groups with a 31 March year-end are less than nine months away from the start of the first accounting period covered by these rules so time is of the essence in ensuring preparedness. If you would like to discuss this further please speak to Thomas Short or your usual KPMG contact.