The Transfer Pricing Records Regulations are here!

Following the Spring Finance Bill 2023 receiving Royal Assent, the Government has published a statutory instrument implementing the new UK Transfer Pricing (TP) documentation requirements. These new regulations mark a major change as, for the first time, the UK has prescriptive mandatory TP documentation requirements. HMRC have also published new guidance. This article lists the Top 10 things that large businesses with UK operations need to know about the new requirements.

The Transfer Pricing Records Regulations 2023 were published on 19 July 2023 and HMRC’s International Manual has also been updated with new guidance at INTM450000 onwards.

We expect to see tougher enforcement by HMRC of penalties for non-compliance under the new regulations. With this in mind, impacted groups should undertake detailed planning addressing what transactions will need documenting, how to gather accurate and timely intercompany transaction data, and what other information will be required for the documentation.

We have summarised below our view of the Top 10 things that large businesses with UK operations need to know about the new requirements:

Timing: The new requirements have effect for corporation tax purposes for accounting periods beginning on or after 1 April 2023, and for Income Tax purposes for 2024-2025 and subsequent tax years. The documentation required for each relevant period is a Master File and Local File which contain the information described in Annexes I and II to Chapter V of the 2022 OECD Transfer Pricing Guidelines (TPG). We are already seeing groups looking to adopt these provisions in advance of the statutory requirement. For those groups who haven’t undertaken a recent review of functional analyses for material transactions impacting UK entities, or groups that do not have defined transfer pricing policies for their UK entities and regular monitoring of actual outcomes, early adoption may help flush out any issues requiring remediation ahead of the first year when a Local File is mandatory.

Businesses in scope: The regulations apply to multinational groups which meet the Country-by-Country Reporting (CbCR) threshold requirement of at least EUR 750 million revenues for the relevant period. However, for large businesses who are below the CbCR threshold, and have material related party cross border transactions, applying the new requirements on a voluntary basis is advised. This is reinforced by the new HMRC guidance which states “HMRC is of the view that an appropriate way to demonstrate that provisions between related parties adhere to the arm’s length principle is to prepare documentation in line with the OECD’s recommended approach even where the MNE group test is not met."

Important exclusions: There are some important relieving measures, some of which are new or amended from the draft regulations previously published for consultation:

• Financial transactions where an investor only meets the participation condition because it is attributed the rights and powers of other persons with whom it ‘acted together’ in relation to the financing arrangements do not need to be included in the Local File;
• Controlled transactions where both parties are resident in the UK do not need to be included in the Local File except where one or both of the parties have elected into Patent Box or are carrying on a ring fence trade;
• Transactions which are the subject of advance pricing agreements (APAs) made with HMRC on or before 31 March 2023 do not need to be included in the Local File. No exemption applies for APAs made after 31 March 2023 but information contained in the APA application or APA annual reports can be leveraged; and
• If after applying these exclusions the relevant UK taxpayer would not be required to include any information about controlled transactions in the Local File then it is not required under the regulations to prepare a Local File or Master File for that period (in practice other countries may still require a Master File). HMRC’s guidance notes that “it is advisable to note the reason (and any supporting analysis) leading to the conclusion that specified transfer pricing records are not required in case of any subsequent HMRC information request."

Summary Audit Trail: The final regulations also provide HMRC with the power to introduce the requirement for affected businesses to produce a Summary Audit Trail (SAT). HMRC have confirmed that they are still planning to undertake a public consultation on the SAT later in 2023. The intent behind the SAT is firstly to encourage in-scope entities to undertake sufficient work to support transfer pricing policies; and secondly 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.

Aggregation of transactions in Local File: The guidance confirms HMRC accept that controlled transactions may be aggregated into a single category when the economically relevant characteristics are materially the same, and the transfer pricing methodology and pricing are the same. Where a category includes multiple transactions with different counterparties, the Local File must identify the different associated enterprises involved and the amount of intra-group payments and receipts must be broken down by tax jurisdiction of the foreign payor or recipient. Low value-adding intra-group services (as defined in the TPG) may be included as a single category of transaction, including where they are provided by or to multiple counterparties. There is specific guidance on aggregation of financial transactions at INTM450103.

Materiality: The guidance confirms that only material categories of controlled transactions need including in the Local File. To assess the materiality of a category of controlled transactions for a UK entity, all the transactions within that category must be aggregated. The appropriate value to consider is the aggregate arm’s length price of the transactions in the category and materiality should be viewed from the perspective of the individual UK entity preparing the Local File rather than the MNE group or UK sub-group. HMRC have listed certain categories of transactions they will always consider material regardless of value due to their nature and complexity. For other categories of transactions, where the aggregate value of the transactions within the category does not exceed a £1 million de minimis threshold, those transactions do not need to be reported in the Local File. The guidance also lists a number of high level considerations to assist taxpayers in making materiality judgements where the £1 million de minimis is not met.

Country File: HMRC’s guidance confirms that the Local File is an entity specific document and should be prepared on an entity-by-entity basis. However, an MNE group may prepare an amalgamated country specific Local File (a ‘UK Local File’). Where a group has prepared a UK Local File that does not cover all UK entities that are required to have a Local File, the UK entities not detailed in the Local File must still produce their own Local File.

Keeping up to date: The Master File and Local File must be reviewed and updated annually to determine whether the functional and economic analyses remain accurate as the business evolves. Where the business description, functional analysis, and/or description of comparables have not changed significantly they may be carried forward into the following period. The requisite frequency of performing a new benchmarking study in cases where the operating conditions remain unchanged will depend on a range of factors, such as those outlined at paragraph 3.82 of the TPG. However, a functional change will necessitate fresh benchmarking.  Financial data for the comparables should be updated annually to apply the arm’s length principle reliably (this would mean rolling forward the financials for a comparable set for the latest financial data rather than a full refresh of the benchmarking). For controlled transactions covered by an APA, there is no requirement to update the comparables during the term of the APA.

Providing TP records to HMRC: Requests for the Master File and Local File (and SAT when introduced) may be made informally to support risk assessment activity or as part of a formal enquiry into a return. HMRC can also use formal information powers to obtain the documentation. The documentation will generally need to be provided within 30 days and failure to comply with an information notice may result in an initial penalty of £300 and daily penalties up to £60 a day. HMRC can issue a notice to provide the documentation any time from the filing date for the relevant tax return and if the records are not available HMRC still expect the relevant person to respond to the information notice within the 30 days to advise that the records are not available. A relevant person that has relied on a UK Local File but is unable to provide a copy in response to an HMRC information notice will be treated as having failed to meet its duty to keep and preserve that record.

SAO responsibility and consequences of compliance failures: We expect to see tougher enforcement by HMRC of penalties for non-compliance under the new regulations. A penalty up to £3,000 may be charged for each failure to keep or to preserve the specified transfer pricing records. More significantly, where a transfer pricing inaccuracy is found in a tax return and the entity has not kept or preserved the specified transfer pricing records, the behaviours associated with that inaccuracy will be presumed to be careless unless the entity can demonstrate that they took reasonable care to avoid the inaccuracy. The behaviours may be found to be deliberate if the relevant person gives HMRC a document that they know contains an inaccuracy. The guidance also states that maintaining the specified transfer pricing records is within the Senior Accounting Officer (SAO) responsibilities and failure to keep the records may be an indication of not establishing and maintaining adequate accounting processes and arrangements.

Please contact the authors or your usual KPMG in the UK contact if you would like to discuss how the new requirements impact your business.

For further information please contact:

• Phil Roper
• Shuchi Chawla