UK: Update on proposed changes regarding transfer pricing documentation

Summary of responses regarding introduction of more prescriptive UK transfer pricing documentation requirements

Responses to introduction of more prescriptive transfer pricing documentation requirements

HM Revenue & Customs (HMRC) on 30 November 2021 published a summary of responses to a March 2021 consultation regarding the introduction of more prescriptive UK transfer pricing documentation requirements—rules that would more closely align the UK standards with those of its major trading partners. 

Read the report of responses to the consultation including next steps.

What was proposed in the consultation?

At present, the UK generally does not have prescriptive transfer pricing documentation rules, although documentation in compliance with the latest OECD guidance is increasingly seen and recommended, particularly for larger groups.

The consultation proposed the introduction of more prescriptive documentation requirements, as summarised below:

  • Preparation of a Master file and Local file when a group has a country-by-country (CbC) reporting obligation (broadly, groups with a consolidated global turnover of at least €750 million) and has UK operations. A mandatory filing obligation is not proposed, but the UK taxpayer would be expected to provide the documentation within 30 days of a request by HMRC.
  • The Local file would be required to include an “evidence log” (as already required as part of the Profit Diversion Compliance Facility (PDCF) report package).
  • A new International Dealings Schedule (IDS) reporting requirement would accompany the annual tax return. It was proposed to apply to all cross-border transactions within the scope of the UK transfer pricing rules.

What was the outcome of the consultation?

HMRC has decided to proceed with the proposed Master file and Local file requirements for businesses within the scope of CbC reporting rules.

The intention is that the required content of the Master file and Local file would be closely aligned with OECD standards set out in BEPS Action 13 (and now incorporated in the 2017 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations).

HMRC does not intend to require the Local file to include a detailed evidence log as originally proposed.  However, HMRC does intend to include a more limited requirement in the form of a summary audit trail.  This will be an additional requirement that would be accompanied by supporting guidance.  In practice, the summary audit trail would be a short, concise document summarising the work already undertaken by the business in arriving at the conclusions in the transfer pricing documentation.

The purpose of the summary audit trail would be two-fold. First, the additional transparency would encourage taxpayers to undertake sufficient work to support transfer pricing policies. Second, it would enable HMRC to undertake high-level quality assurance on the transfer pricing documentation and therefore would allow better focus on higher risk areas during enquiries. The summary audit trail would be designed to achieve these aims without imposing a disproportionate burden on taxpayers, and further consultation is expected on this in 2022.

HMRC has decided not to implement, or consult further, on the IDS at the present time. However, HMRC still believes that an IDS requirement could have significant benefits to both HMRC and businesses and will keep the issue under consideration for possible implementation in the future.

What are next steps and timing of changes?

HMRC intends to consult on draft legislation in 2022, and introduce the Master file and Local file documentation requirement for the largest taxpayers with CbC reporting obligations. A command paper [PDF 312 KB] (November 2021) confirms an intention to legislate in 2022 and for the changes to be effective from April 2023.

Accordingly, large businesses within the scope of CbC reporting need to plan for the changes applying to corporation tax filings due on or after 1 April 2023 (which could affect transactions taking place in 2021 and 2022, depending on the taxpayer’s year-end). 

KPMG observation

In the five-year period (from 2015/16 through 2019/20), HMRC brought in over £6 billion in additional tax from transfer pricing compliance activities.  Transfer pricing continues to be a significant area of risk for HMRC, and a major source of uncertainty for UK companies with international related-party dealings.

Even companies that do not satisfy the threshold and are deemed to be “too small” for CbC reporting need to note these proposed changes. While businesses below the CbC reporting threshold may not be directly affected by the revised proposals, HMRC comments in the summary of consultation responses reiterate some important points around compliance with existing transfer pricing requirements:

  • HMRC recognises the Master file and Local file requirements as representing best practice for transfer pricing documentation and encourages all businesses subject to UK transfer pricing to take this approach to documentation, when appropriate.
  • HMRC considers 30 calendar days from the date of issue of a request to be a reasonable amount of time for the provision of existing documentation. The purpose of the Master file and Local file is to support the transfer pricing policies underlying the filed return, and therefore these documents need to be prepared in advance of preparation of the tax return.
  • HMRC comments on the summary audit trail requirement are indicative of expectations on the level of diligence with regard to transfer pricing in terms of the evidence base supporting the conclusions and the frequency with which the key facts and supporting evidence are revalidated and documentation updated.

What about UK-UK transactions? Is arm’s length transfer pricing still applicable?

UK-UK transactions between associated persons remain within the scope of the UK transfer pricing rules. In certain instances, HMRC has sought to impose penalties for careless behaviour in relation to UK-UK transfer pricing adjustments. 

However, the response to the consultation indicates that unless there is a material UK tax risk (for example when entities benefit from oil and gas ringfencing or when there is an asymmetry in tax rates), HMRC will not require inclusion of UK-UK transactions in the Master file and Local file.

KPMG observation

In view of the forthcoming changes (as well as the introduction of the uncertain tax treatment notification requirement for large businesses), taxpayers need to evaluate their transfer pricing policies and whether they are documented in compliance with OECD standards.  Given the expected effective date for these changes, it would be prudent to determine that documentation for the 2021 accounting period meets the OECD requirements and if not, then consider how to adapt a documentation strategy that would satisfy the proposed changes.

KPMG tax professionals are planning on further discussions with HMRC as part of the next consultation in 2022, and it would be helpful to hear the views of potentially affected businesses.

Read a December 2021 report prepared by the KPMG member firm in the UK

For more information, contact a professional with KPMG’s Global Transfer Pricing Services practice in the UK:

Daniel Head | +44 161 2464742 |


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