When SAT-delay Comes

Draft UK transfer pricing documentation regulations published for consultation but Summary Audit Trail delayed.

UK TP documentation; a delay to the SAT.

Shortly before Christmas, the UK Government published a draft statutory instrument (The Transfer Pricing Records Regulations 2023) to introduce new transfer pricing documentation requirements. The draft rules are largely as expected insofar as they apply to Multinational Enterprises (MNEs) with turnover of €750m or more and which have taxable operations in the UK, and require the preparation of an OECD-standard Master File (MF) and UK Local File (LF) for each taxable person for Accounting Periods commencing on or after 1 April 2023. There are two important developments to note. Firstly, the proposal for an accompanying Summary Audit Trail (SAT) will now be delayed pending a public consultation in 2023. Secondly, the draft regulations exclude UK-UK transactions unless one of the parties has elected into the Patent Box or is carrying on a ring fence trade. HMRC are seeking comments by 31 January 2023.

Unusually among developed economies, the UK does not currently specify the contents of its transfer pricing documentation in legislation. Although OECD-standard documentation has increasingly been expected and recommended in recent years, especially for larger groups, in practice implementation has varied. Perceiving a source of taxpayer confusion and potential difficulties in TP compliance, the Government is to introduce a new requirement for UK members of multinational groups with consolidated global revenues of at least €750 million – in other words those subject to Country-by-Country Reporting. Affected UK taxpayers must maintain, and submit within 30 days of a request from HMRC, documentation in accordance with the OECD MF and LF requirements (as detailed in Annex I and Annex II to Chapter V of the OECD Guidelines).

The draft regulations published for consultation in December confirm that the MF / LF requirements will apply to Accounting Periods beginning on or after 1 April 2023, as previously announced. However, there is now to be a delay to the introduction of the proposed SAT document. The SAT was to be an additional requirement beyond the OECD standards, unique to the UK, which provides additional transparency on the the work already undertaken by the customer in arriving at the conclusions in their transfer pricing documentation. The SAT had two stated purposes:

  1. To encourage customers to undertake sufficient work to support transfer pricing policies; and
  2. To enable HMRC to undertake high level quality assurance on the transfer pricing documentation and therefore allow better focus on higher risk areas during enquiries.

For the moment the draft regulations merely contain an enabling provision, giving HMRC the power to introduce, by way of a published notice, a SAT requirement. HMRC will undertake a separate public consultation on the SAT in 2023, subject to which a decision on its implementation is expected, but HMRC have confirmed it will not come into effect at the same time as the MF/LF requirements.

Development of the SAT requirements has progressed in recent months. It seems apparent that the main challenge will be to design a document that contains sufficient, targeted information to support the taxpayer to maintain reliable and up-to-date evidence for the assertions in the documentation, and demonstrate this to HMRC, without itself becoming an undue compliance burden or ‘cottage industry’. To this end it is likely that a distinction will be needed between providing relevant and useful information on the sources and timing of evidence collection which underpins the documentation, whilst avoiding repetition or precis of the content of the TP documentation itself.

The delay in introducing a SAT to allow for additional consultation should help to achieve this aim and will be welcome news for large businesses. That said, HMRC can be expected to continue their focus on the quality of TP documentation and to challenge (and potentially penalise) instances in which the stated facts on which the TP analysis is based appear inconsistent or out of date compared to the facts on the ground. UK multinational group members should continue to ensure that their TP documentation is based on accurate, updated and available evidence.

A UK-UK exemption from the LF requirement was expected and it is welcome confirmation that exceptions to this are limited to circumstances where one of the parties to the transaction has elected into the Patent Box or is carrying on a ring fence trade. This should help reduce the compliance burden for large groups with multiple UK entities.