Policy paper

Transfer Pricing Documentation

Published 15 March 2023

Who is likely to be affected

This measure will primarily affect businesses operating in the UK, which are part of a large multinational enterprise group that has global revenues of €750 million or more.

General description of the measure

Transfer pricing is a means of pricing transactions between connected parties, based on the internationally recognised arm’s length principle which seeks to determine what the price would have been if the transactions had been carried out under comparable conditions by independent parties.

In recent years there have been significant developments in the field of international tax. It has been more than six years since the Organisation for Economic Cooperation and Development (OECD) presented a package of measures in response to the G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan including a requirement to develop rules regarding transfer pricing documentation.

The Action 13 Final Report recognised the importance of having the right information at the right time to identify and resolve transfer pricing risks. This led to the introduction of guidance on a standardised approach to transfer pricing documentation. The standardised approach consists of (i) a master file containing standardised information relevant for all multinational enterprise (MNE) group members; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a country-by-country (CbC) report for the largest MNE groups containing aggregate data on the global allocation of income, profit, taxes paid and economic activity among the tax jurisdictions in which it operates.

The UK implemented the CbC minimum standard but did not introduce specific requirements regarding a master file and local file because the UK already had broad record keeping requirements. Experience has shown that the absence of specific transfer pricing documentation requirements, and supporting guidance, has created a degree of uncertainty for UK businesses regarding the appropriate transfer pricing documentation they need to keep, leading to inconsistency of approach.

This measure will implement the additional recommendations of the BEPS Action 13 Final Report in relation to the master file and local file. UK businesses are already required to keep and retain sufficient records to demonstrate that their tax returns are complete and accurate, including in respect of any figures affected by the transfer pricing rules, but this measure will prescribe the format in which this should be done.

Additionally, HMRC will continue to consult on a “summary audit trail” (SAT) requirement. This would oblige in scope businesses to complete a questionnaire detailing the main actions they have taken in preparing the transfer pricing local file document.

Policy objective

This measure is to ensure that businesses maintain, and provide upon request, transfer pricing documentation prepared in accordance with OECD Transfer Pricing Guidelines.

Accessing high quality data in a standardised format will enable HMRC to carry out more informed risk assessments, to target resources more efficiently and to reduce the time taken to establish the facts in compliance interventions.

Moreover, having to clearly report transfer pricing information within specific documentation, will result in businesses having a clearer and more robust transfer pricing position to inform the filing of their return. This may encourage and incentivise businesses that adopt higher risk transfer pricing positions to change their behaviour.

Background to the measure

The measure was consulted on in 2021, which began on 23 March 2021 and concluded 1 June 2021.

In response to the consultation, we announced on Tax Administration and Maintenance Day (TAMD) 2021 (30 November 2021) our intention to legislate for transfer pricing documentation, confirming that we would consult on draft legislation for the measure during 2022.

The draft primary legislation was published for technical consultation as part of L-Day 2022 (20 July 2022), with the measure’s secondary legislation published for comment on 21 December 2022.

Detailed proposal

Operative date

This measure will have effect for accounting periods commencing on or after 1 April 2023 for corporation tax purposes. For Income tax purposes it will apply to the 24/25 tax year and subsequent years.

Current law

Current law on record keeping for companies is contained in Paragraph 21 Schedule 18 Finance Act 1998. Current law on record keeping for individuals, trusts and partnerships is contained in s12B Taxes Management Act 1970.

Current law on information and inspection powers is contained in Schedule 36 Finance Act 2008.

Current law on penalties for errors is contained in Schedule 24 Finance Act 2007.

Current law on assessments for companies where a loss of tax is discovered, or a determination of an amount is discovered to be incorrect, is contained in Paragraph 41 Schedule 18 Finance Act 1998. Current law on assessments and claims for individuals, trusts and partnerships is contained in Part IV Taxes Management Act 1970.

Proposed revisions

The main revisions are those which are being made to Paragraph 21 Schedule 18 Finance Act 1998 and s12B Taxes Management Act 1970. New powers are being built into each of these pieces of legislation to enable regulations to specify certain transfer pricing records which must be kept and preserved. The regulations will specify that the master file and local file documents must be kept and preserved.

Revisions are also being made to Schedule 36 Finance Act 2008. This is to ensure that an information notice can specify transfer pricing information or documents referenced in the regulations under the new Schedule 18 Finance Act 1998 and s12B TMA 70 powers. Changes have also been made to Schedule 36 to ensure that the relevant transfer pricing documents can be requested outside an enquiry and to remove the requirement for the documents to have to be in the “possession or power” of the UK entity in question when they are in the “possession or power” of another person within the multi-national group.

Additionally, revisions are being made to Schedule 24 Finance Act 2007. This is to put it beyond doubt that failures to do the work necessary to maintain the relevant records or to produce those records on request will lead to the presumption that an inaccuracy in relation to the application of transfer pricing rules is careless. The relevant taxpayer can only displace this presumption by demonstrating that the returned position was arrived at by having taken reasonable care.

Finally, revisions are being made to Part IV Taxes Management Act 1970 and Schedule 18 Finance Act 1998 to ensure that the presumed carelessness, as described above, is also applicable to the extended time limits where HMRC discovers a loss of tax or discovers a determination of an amount is incorrect and the inaccuracy relates to the application of the transfer pricing rules. The relevant taxpayer can only displace this presumption by demonstrating that the returned position was arrived at by having taken reasonable care.

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2022 to 2023	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
—	nil	nil	nil	+50	+80

These figures are set out in Table 5.1 of Autumn Statement 2022 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will impact on a very limited number of individuals who are required to file a partnership or trust return and the partnership or trust to which the return relates is both within the scope of transfer pricing legislation and considered part of a large multinational enterprise (global revenues of €750m or more). These individuals will be required to prepare transfer pricing documentation in line with updated guidance.

Customer experience is expected to remain broadly the same as affected individuals will not see a significant change.

This measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on approximately 3,500 businesses by formally requiring transfer pricing documentation to be prepared in line with updated guidance.

One-off costs would include familiarisation with updated documentation guidance and could include obtaining further information to use in transfer pricing documentation where the business does not already do so. Continuing costs could include maintaining documentation as part of business as usual compliance activity.

Customer experience is expected to remain broadly the same as affected businesses will not see a significant change.

This measure is not expected to impact civil society organisations.

Operational impact (£m) (HMRC or other)

There are no financial consequences for HMRC as a result of this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through regular communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Leighton Oakes on Telephone:03000 582 194 or email: leighton.oakes@hmrc.gov.uk.