New Transfer pricing documentation requirements take effect

Andrew Hawley, Partner, Corporate Tax
As previously announced, HMRC’s new, more prescriptive, transfer pricing documentation requirements for the largest UK businesses will take effect for accounting periods beginning on or after 1 April 2023.

Who do the new rules apply to?

The new documentation requirements will apply to Multinational Enterprises (MNE’s) with taxable operations in the UK and consolidated turnover that exceeds €750 million in the period in question. This is the same turnover level as the country by country reporting threshold and the new pillar 2 rules.

What are the requirements of the new rules?

Up until 1 April 2023, entities in scope of the UK transfer pricing rules were required to have formal transfer pricing documentation in place to support their connected party transactions, but there was no standard format for this documentation. This will change from 1 April 2023 for the largest UK businesses, with the UK implementing the additional recommendations of the BEPS Action 13 Transfer pricing documentation and country-by-country reporting.

The new documentation rules require the following:

  • a master file – this consists of standard information about all group entities, providing an overview of the group

  • a local file – this focuses at the entity level rather than at group level and refers specifically to key transactions of the UK business

  • a country-by-country report – a report providing insight on the cumulative figures for the global allocation of income, profit, taxes paid and economic activity for all relevant group entities.

The UK had previously implemented the minimum country-by-country reporting standard but did not introduce specific requirements regarding master file and local file. HMRC now feel that the absence of specific requirements has led to uncertainty amongst larger businesses, and inconsistency of approach.

HMRC had intended to also implement a Summary Audit Trail (SAT) requirement which would involve businesses completing a questionnaire detailing the main actions they have taken in preparing the transfer pricing local file. However, the Government has decided more consultation is needed and has delayed the implementation of the SAT.

New HMRC powers

The new rules also extend HMRC’s powers in how they obtain transfer pricing information from UK businesses. Transfer pricing documentation could be requested outside of a formal enquiry and documents not in the ‘possession or power’ of the UK business will be able to be requested from another member of the group. HMRC would normally give a business 30 days to provide relevant documentation.

What does this mean for businesses?

Transfer pricing remains high on HMRC’s agenda and they will seek to levy penalties for failure to take reasonable care in a number of circumstances including where insufficient documentation existed at the time the corporation tax return was filed.

Despite the specific documentation requirements only being mandatory for larger UK businesses within the country by country reporting thresholds, HMRC’s general expectation is that all UK transfer pricing documentation should follow this best practice format.  It is therefore recommended that large businesses below the larger threshold, particularly those within the scope of Senior Accounting Officer, ensure their documentation complies with the new proposed standard, particularly given HMRC’s continued focus on transfer pricing and compliance.

What should businesses do?

In light of all this, finance officers of MNE’s should ensure they:

  • understand how these new requirements impact their business
  • review the businesses’ current transfer pricing arrangements and documentation to ensure they are fit for purpose
  • identify any changes or updates required
  • formulate a plan to make any required updates and ensure compliance.

In an ideal world transfer pricing compliance should be reviewed annually and best practice adopted where practically possible.

For more information on how Crowe can help, please contact Andrew Hawley or your usual Crowe contact.

Contact us

Andrew Hawley
Andrew Hawley
Partner, Corporate Tax
Thames Valley