Recent changes by the U.K. taxing authority (HMRC) to its tax code aim to update its approach to the treatment of multinational enterprises (MNEs) and the valuation and documentation of their intercompany transactions. When the Organisation for Economic Cooperation and Development (OECD) published Action 13 of the Base Erosion and Profit Shifting (BEPS) Action Plan, the HMRC elected to adopt only the country-by-country reporting (CbCR) requirements, opting out of the additional master file and local file requirements. Businesses in the U.K. have hitherto been keeping and maintaining sufficient records to document that their tax returns were complete and accurate, including any impacts of transfer pricing rules. Thus, the additional documentation put forth by the OECD was not seen as necessary.
With the desire to improve clarity and standardize transfer pricing reporting, on 20 July 2022, the U.K. published draft legislation as part of the draft Finance Bill 2022/23. The new regulations would make it a requirement for multinational businesses with €750 million or more of global revenue, and which operate in the U.K., to prepare standardized transfer pricing documentation in the OECD master file and local file format.
The legislation will apply for accounting periods commencing on or after 1 April 2023. In addition to the master file and local file requirements, certain U.K. taxpayers with cross-border intercompany transactions will need to prepare a “summary audit trail” (SAT). The SAT is essentially a questionnaire that details the main actions the MNE has taken in preparing the transfer pricing local file. Although many MNEs have been opting to prepare OECD-compliant local files covering U.K. intercompany transactions in recent years, the proposal will make such practice a requirement for large MNEs operating in the U.K. Smaller MNEs, which fall under the group revenue requirement, are also encouraged, but not required, to prepare a local file.
According to the U.K.’s policy paper on the draft legislation, the new requirements will “create a degree of certainty for U.K. businesses which are part of an MNE Group to which the regulations will apply regarding the appropriate transfer pricing documentation they need to keep, leading to consistency of approach. It will also provide HMRC with high quality data in a standardised format to target resources on the most significant areas of transfer pricing risk and reduce the time taken to complete compliance interventions.”1 Furthermore, the HMRC hopes that by maintaining robust transfer pricing documentation, companies will be incentivized to adopt less risky transfer pricing behavior.
MNEs with U.K. cross-border requirements should evaluate their existing transfer pricing documentation to determine if it will meet the new U.K. requirements.
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- 1[11/29 3:01 PM] Miller, Sandra “Policy Paper: Transfer pricing documentation,” HM Revenue & Customs, 20 Jul 2022 (Accessed 29 October 2022). Transfer pricing documentation