Transfer pricing scope and documentation

Question 1

Summary

Accepted Answer

Subject of this consultation

This consultation seeks views on two related proposals. Both are designed to protect the UK tax base against cross-border profit diversion by multinational enterprises (MNEs) and align the UK more closely with international peers. The government intends to take a fair and proportionate approach to these proposals and mitigate any additional administrative burden on businesses wherever possible.

The first proposal is to amend the current exemption from transfer pricing for small and medium-sized enterprises (SMEs), to better define and defend the UK tax base. Changes to certain definitions and thresholds are also suggested with the intention of making the exemption clearer and easier to apply.

The second proposal is to introduce a requirement for multinationals to report information on cross-border related party transactions to HMRC through an International Controlled Transactions Schedule (ICTS). The ICTS will focus on objective and readily available information that will help facilitate better identification of transfer pricing risk and allow for more efficient and targeted compliance activity.

These proposals sit alongside the government’s proposal to reform UK law in relation to transfer pricing, permanent establishment (PE), and Diverted Profits Tax. Transfer pricing reform includes the general repeal of the requirement to apply transfer pricing to UK to UK transactions. The government recommends that businesses review both consultation documents together, as a balanced package of proposals on international tax reform.

Scope of this consultation

The government is seeking views on several possible amendments to the SME exemption. These proposals include the removal of the exemption for medium-sized enterprises and possible changes to the definition of small enterprises.

The government is also seeking views on the introduction of a requirement to file an ICTS and the proposed scope of the reporting requirement. A draft form illustrating the information that would need to be reported to HMRC is attached at Annex B.

The government welcomes suggestions from stakeholders on how its aims can be achieved whilst limiting any administrative burden on businesses.

Who should read this

This consultation document should be read by:

businesses currently within scope of the UK transfer pricing or PE legislation
businesses that currently fall within the SME exemption from transfer pricing
advisory firms, representative bodies, and legal firms acting for those businesses

Duration

The consultation will run for 10 weeks from 28 April to 7 July 2025.

Lead official

The lead officials are Jennifer Buchanan, Steve Edge, Lewis Field, and James Thompson of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

Please email responses to tp_scope_and_documentation@hmrc.gov.uk.

We will also be holding a number of consultation events:

22 May 2025 – in-person only event at 100 Parliament Street, London (registration closes 14 May)
3 June 2025 – livestream event (registration closes 26 May)
18 June 2025 – livestream event (registration closes 10 June)

To register please complete this registration form before the closing date for your preferred event.

Additional ways to be involved

Officials will hold meetings with interested stakeholders who wish to discuss the proposals.

The consultation concerns specialist subject matter and officials will approach stakeholders that are likely to have an interest through established channels.

After the consultation

The government will analyse the responses to the consultation and publish its response after the consultation closes. The response will address the government’s findings regarding potential benefits and costs arising from the potential new measures. If the government concludes that there is merit in introducing either or both of these changes, then officials will work towards implementation at a future fiscal event.

Getting to this stage

Section 166 Taxation (International and Other Provisions) Act 2010 (TIOPA) exempts the vast majority of transactions carried out by small and medium-sized enterprise from transfer pricing.

What constitutes a small and medium-sized enterprise under UK law is a modification of the European Commission recommendation (2003/361/EC).

Under The Transfer Pricing Records Regulations 2023, the government introduced a requirement for the largest businesses to maintain specific transfer pricing documentation and provide it on request. Those documents, the master file and local file, need to be prepared in accordance with Chapter 5 of the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines (TPG) 2022.

HMRC continues to review transfer pricing documentation requirements in order to ensure that they are proportionate and consistent with the aim of facilitating efficient, targeted compliance activity. This allows HMRC to spend more time on non-compliant customers.

Stakeholders may be interested to review the separate consultation on transfer pricing reform measures which is published at the same time as this consultation.

Previous engagement

Amendments to the SME exemption have not previously been consulted on.

The previous government consulted on a similar proposal to the ICTS in 2021: Transfer pricing documentation. Responses received at that time have been taken into account in the preparation of the current proposal.

Question 2

1.  Introduction

Accepted Answer

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

The UK transfer pricing legislation is contained within Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA). The international consensus on applying the arm’s length principle is set out in the Organisation for Economic Cooperation and Development TPG. UK transfer pricing legislation is interpreted in accordance with the TPG.

This consultation seeks views on two related proposals. Both are designed to protect the UK tax base against cross-border profit diversion by MNEs and align the UK more closely with international peers. The government intends to take a fair and proportionate approach to these proposals and mitigate any additional administrative burden on businesses wherever possible.

The first proposal is to amend the current exemption from transfer pricing for SMEs, to better define and defend the UK tax base.

This consultation seeks views on the removal of the medium-sized enterprise exemption. The exemption for small enterprises would be maintained. The government is also seeking views on several possible changes to the exemption to ensure that it is fit for purpose, clear, and easy to apply.

As other countries already require transfer pricing rules to be applied to cross-border related party transactions, the impact of this change may be limited. Given the proposed amendments to UK-UK transfer pricing, in general the requirement would only apply to cross-border transactions, further mitigating any administrative burden. Small businesses would continue to be exempt.

The second proposal is to introduce a requirement for multinationals to report information on cross-border related party transactions to HMRC through an ICTS.

The information provided on an ICTS would be highly valuable to HMRC in facilitating automated, data-led risk assessment and more accurate identification of transfer pricing risk. It would also be expected to increase efficiency by promoting upstream tax compliance and reducing the length of transfer pricing enquiries. Taxpayers would benefit from shorter, better targeted enquiries from HMRC that are focused on cases where adjustments to transfer pricing are required.

The ICTS is intended to be proportionate, aligned with moderate overseas equivalents, and focused on information that is objective and readily available. To limit the administrative burden on businesses, it is proposed that data be provided on an aggregated basis. Materiality thresholds and exemptions where transactions are covered by Advance Pricing Agreements are also suggested.

This consultation seeks views on the introduction of a requirement to file an ICTS and the proposed scope and content of the draft reporting requirement.

Question 3

2.  Amendments to the exemption for small and medium-sized enterprises

Accepted Answer

Exemption overview

The general exemption of SMEs from the UK’s transfer pricing rules is set out at Section 166 TIOPA.

There are specific exceptions which can bring a SME back within scope of transfer pricing. Those are set out at Sections 167, 167A and 168 TIOPA. Broadly those exceptions are where the taxpayer elects to forego the exemption, where HMRC issues a transfer pricing notice, or where transactions are linked to non-qualifying territories.

The SME definition is provided in Section 172 TIOPA. Section 172 references the criteria in the Annex to Commission Recommendation 2003/361/EC regarding the definition of micro, small, and medium-sized enterprises. Those definitions are indirectly imported into UK law, subject to specific modifications under Sections 172(4)–(7) TIOPA.

Rationale for reforms to the SME Exemption

Transfer pricing rules play a pivotal role in protecting the UK tax base by ensuring that UK companies are compensated appropriately for transactions with related parties, preventing multinationals from avoiding tax. This protection is notably absent for a sizeable proportion of the population due to the SME exemption.

The SME exemption was introduced when UK to UK transfer pricing was brought in to comply with EU rules. The exemption was designed to mitigate the impact of UK to UK transfer pricing on smaller businesses.

The UK subsequently left the EU. The government has also proposed to largely repeal the UK to UK requirement as set out in the technical consultation on transfer pricing reform. This would substantially reduce the administrative burden of applying transfer pricing rules to smaller enterprises, as they would generally only apply to cross-border transactions with connected parties.

The UK is an international outlier in having exemptions from transfer pricing. Most exempt businesses will therefore already need to apply the transfer pricing rules of another territory to their cross-border transactions with connected parties. The additional burden of applying international standards on transfer pricing in the UK may therefore be limited.

Given this context, the government is proposing to remove the medium-sized enterprise exemption. The government is proposing to retain the exemption for small enterprises, given the greater potential administrative impact applying transfer pricing would have on that population. The government is also proposing several changes to the exemption to ensure that the relevant definitions and legislation remain fit for purpose and are clear and easy to apply.

Small enterprise exemption

Current law

Small enterprises are those with staff headcount and either turnover or balance sheet total (or both) below the following thresholds, when combined with linked and partner enterprises.

Table 1: Small enterprise staff headcount

Business type	Maximum number of staff	And less than one of the following limits: annual turnover	Balance sheet total
Small Enterprise	50	€10 million	€10 million

Staff headcount includes:

employees, with part-time workers counted proportionally
owner-managers
partners actively participating in and benefiting financially from the enterprise

Staff headcount excludes:

students in vocational training or apprenticeships
staff on maternity or paternity leave during their absence

Turnover refers to income from product sales and service provision during a fiscal year, calculated annually and net of VAT and other indirect taxes.

The balance sheet total is calculated for the fiscal year on an annual basis.

An enterprise’s status changes only if it exceeds the relevant threshold for two consecutive periods. However, section 172(7)(b) omits this provision, meaning UK enterprises lose their exemption after one period of exceeding thresholds.

Policy proposals

The government proposes to continue to exempt small enterprises from transfer pricing given the potential greater administrative burden applying the rules would place on that population.

Question 1: The government welcomes views on the proposal to maintain an exemption from transfer pricing for small enterprises.

Currently, the classification of SMEs is based on a combination of three metrics: turnover, balance sheet total, and staff headcount. These metrics are widely recognised and provide a balanced approach to defining enterprise size for transfer pricing purposes.

The government has explored the feasibility of simplifying the existing criteria by focusing on a single metric, such as staff headcount or financial thresholds. However, this approach may not adequately reflect the diversity of business models across sectors. For instance:

enterprises in sectors like financial services may have a small staff footprint but generate significant turnover, making financial metrics a necessary complement to staff headcount
conversely, businesses with a high staff count but modest financial figures are appropriately captured under the current framework

The government has also explored whether a transaction-based test could replace the exemption for small-sized enterprises. That test could be based on one, or both, of the following metrics:

exemption based on the value of related party transactions that an entity enters into
exempting entities based on the number of related-party cross-border transactions

The government believes that a test based on transaction value is likely to be of limited use. Businesses would need to determine the arm’s length price of their transactions before being able to determine whether the exemption applied. This would not seem to reduce the compliance obligations on businesses.

The government has also considered an exemption based on the volume of cross-border transactions. However, given one very large cross-border related party transaction could still present a substantial tax risk, this would need to be combined with a transaction value test and so the same issue arises.

The government therefore proposes to continue to define small enterprises by reference to turnover, balance sheet total, and staff headcount.

Question 2: The government welcomes views on the proposal to continue to define small enterprises by reference to turnover, balance sheet total, and staff headcount. Views are also invited on whether alternative metrics or approaches would be preferable.

The government proposes to retain the definition of a small enterprise set out in the Annex to Commission Recommendation (2003/361/EC) and import that definition directly into UK legislation, subject to a change in currency.

The government proposes amending the existing thresholds which refer to euros to reference turnover of £10 million and balance sheet total of £10 million. This would be more directly relevant to UK businesses and provide a more generous threshold than is currently in place.

Question 3: The government welcomes views on the proposed amendment of the small enterprise threshold from €10 million turnover and balance sheet total to £10 million turnover and balance sheet total.

The government also proposes that only changing the status of an enterprise where the ‘small’ threshold is exceeded in two consecutive periods would be beneficial, as it would enhance stability and predictability for businesses.

Question 4: The government welcomes views on the proposal to only change the status of a small enterprise where the threshold is exceeded in two consecutive periods.

Medium-sized enterprises current law

Medium-sized enterprises are those with staff headcount and either turnover or balance sheet total (or both) below the following thresholds, when combined with linked and partner enterprises.

Table 1: Medium-sized enterprise staff headcount

Business type	Maximum number of staff	And less than one of the following limits: Annual turnover	Balance sheet total
Medium Enterprise	250	€50 million	€43 million

Policy proposals

The government proposes to remove the exemption from transfer pricing for medium-sized enterprises. The government is concerned that this exemption creates a gap in the definition and protection of the UK tax base which gives rise to a significant risk of cross-border profit diversion.

The government believes that medium-sized enterprises have the capacity to follow the transfer pricing rules. Most will already be required to apply the transfer pricing rules of another territory to their cross-border transactions with related parties.

The administrative burden of this change is further mitigated by the proposal to largely repeal the requirement to apply transfer pricing to UK to UK transactions. Additionally, defining small enterprises by reference to £10 million turnover and balance sheet total rather than €10 million would mean that some of the smaller enterprises that are currently defined as medium-sized would continue to be exempt.

Question 5: The government welcomes views on the proposal to remove the exemption for medium-sized enterprises from transfer pricing.

Exceptions to the SME exemption

Current law

Both small and medium enterprises may elect to disapply the exemption from transfer pricing under Section 167(2) for a given chargeable period.

The exemption is also disapplied for small and medium enterprises if the entity enters into a provision or series of transactions with a resident in a non-qualifying territory (Section 167(3)).

A non-qualifying territory is defined in Section 173 as any territory not meeting the criteria for a qualifying territory. A qualifying territory must either:

have a double taxation agreement with the UK that includes a non-discrimination provision and not be designated as non-qualifying by Treasury regulations
be specifically designated as a qualifying territory in Treasury regulations

For these purposes, a non-discrimination provision ensures that nationals of one state do not receive less favourable tax treatment than nationals of the other state in the same circumstances.

For small enterprises, transfer pricing notices may only be issued if the relevant provision contributes to the calculation of profits eligible for the Patent Box (Section 167A). Appeals are limited to asserting that the provision is not relevant to the Patent Box calculation.

There is no such restriction on issuing transfer pricing notices to medium enterprises. Appeals are restricted to disputing whether the entity qualifies as a medium enterprise.

Policy proposals

The government proposes to retain the ability for enterprises to elect to disapply the exemption.

The government also proposes to retain the ability to issue transfer pricing notices to small businesses where the relevant provision contributes to the calculation of profits eligible for the Patent Box.

The non-qualifying territory exception is intended to apply transfer pricing to otherwise exempt SMEs where there is a high risk of profit diversion.

The government is interested in views on whether the current approach meets the aim of preventing profit diversion, or whether the government should review that exception.

Question 6: The government welcomes views on the proposed approach to exceptions to the SME exemption, including whether the non-qualifying territory exception should be reviewed.

In considering whether the non-qualifying territory exemption should be reviewed, the government would welcome views on possible alternative approaches.

One alternative approach could be to expand the definition of qualifying territory to include territories with a higher headline corporate tax rate than the UK. This would make the exception more focused on entities transacting with related parties in territories where there is a clearer opportunity for profit diversion.

Another approach could be to remove the test of whether the entity transacts with related parties in non-qualifying territories. Instead, small enterprises could be required to apply transfer pricing to interest and royalties but not other transaction types.

Taxpayers are already required to apply transfer pricing to interest and royalty transactions to qualify for relief from withholding tax under treaties. This approach would be designed to reduce the opportunity for profit diversion without materially increasing administrative burden.

If stakeholders support changes to the non-qualifying territory exception, the government may need to consider consequential changes to the ICTS.

Question 7: The government welcomes suggestions of alternatives to the non-qualifying territory exception, and comments on the potential alternative approaches outlined in this document.

Definition of enterprise

Current law

The term ‘enterprise’ encompasses any entity engaged in economic activity, regardless of legal form. Economic activity entails offering products or services in a direct market setting.

Autonomous enterprises

An enterprise is deemed autonomous if it is entirely independent. This means it neither holds nor is subject to any participation exceeding 25% of the capital or voting rights in other enterprises. Autonomous status indicates that the enterprise is neither a partner nor linked to another entity.

Generally, most SMEs operate autonomously, either as fully independent entities or with one or more minority partnerships, each holding less than 25% of capital or voting rights.

Partner enterprises

An enterprise is classified as a partner if it holds at least 25%, but no more than 50%, of the capital or voting rights in another enterprise, or if another enterprise holds the same proportion in it. However, the relationship does not extend to linked enterprise status, meaning that voting rights must not exceed the 50% threshold.

Partner enterprise data is included in SME calculations proportionally, based on shareholding or voting rights. Meaning a 40% stake requires including 40% of the partner enterprise’s headcount, turnover, and balance sheet.

Institutions that don’t qualify as partners, despite 25 to 50% of capital/voting rights

The following institutions do not qualify as partner enterprises even when entities exceed the 25% threshold:

public investment corporations
venture capital companies or business angels
universities or nonprofit research centres
institutional investors
autonomous local authorities with a budget under €10 million and fewer than 5,000 inhabitants

Linked enterprises

This category applies to enterprises that form a group through direct or indirect control, where one entity holds the majority of voting rights or exercises a dominant influence over another. References to control in the legislation include legal and de facto control.

An enterprise is linked to another if:

it controls a majority of shareholders’ or members’ voting rights
it has the right to appoint or remove the majority of an administrative, management, or supervisory body (excluding rights held by liquidators or administrators during liquidation or administration)
it exercises dominant influence via contractual agreements or provisions in governing documents
it solely controls the majority of voting rights through agreements with other shareholders or members

A typical example of a linked enterprise is a wholly owned subsidiary.

An enterprise cannot qualify as a SME if a public body owns 25% or more of its capital or voting rights unless it falls under the specific exemptions. SME status calculations must include the enterprise’s data, proportionate data from partner enterprises, and all data from linked enterprises.

The EU definition permits a ‘declaration of good faith’ to classify enterprises as autonomous, partner, or linked. This does not apply to the Part 4 TIOPA SME exemption.

Policy proposals

The government is committed to ensuring that any reforms to the definition of ‘enterprise’ are clear, effective, and aligned with broader tax policy objectives including simplification.

The current definition of ‘enterprise’ is complex and may present challenges for businesses applying the SME exemption. The government proposes that aligning the definition of enterprise directly with the definition used in the participation condition could address these challenges.

This would streamline the rules by ensuring consistency with the entities subject to transfer pricing rules. Under this proposal, the definition of ‘enterprise’ would include all entities with a participatory relationship as defined under section 148 of TIOPA. This approach would simplify the current framework by aligning the entities eligible for the exemption with those subject to transfer pricing rules.

However, the UK has used the current definition of enterprise for some time and the government recognises that it may be well understood. The government is therefore also interested in views on whether importing the existing definition of an enterprise directly into UK law without making any changes would be preferable.

Question 8: The government welcomes views on whether aligning the definition of enterprise with the scope of the participation condition would make the SME exemption easier to apply.

Subject to limited exceptions such as in the acting together rules, transfer pricing does not generally apply to transactions involving a 25% to 50% shareholder relationship. This raises questions about the rationale for maintaining the partnership enterprise concept in its current form.

The government therefore proposes removing the concept of partner enterprises from the definition of an enterprise for the purposes of the SME exemption.

Question 9: The government welcomes views on whether removing partner enterprises from the definition of enterprise would simplify the application of the SME exemption.

Question 10: The government welcomes any other comments, suggestions, or feedback on the proposed amendments to the SME exemption.

Benefits and impacts

Newly in scope groups would need to ensure that related party transactions are priced at arm’s length. Transfer pricing policies for UK entities would need to be defined and regularly monitored against actual outcomes.

It is appropriate to highlight that all businesses are required to keep records to make and deliver a correct and complete tax return. HMRC would typically expect some level of record-keeping in relation to transfer pricing policies, even where the requirement to prepare specific transfer pricing documentation is not met.

Additionally, newly in scope groups would likely be affected by the proposal to introduce reporting requirements for cross-border related party transactions, should this measure be implemented.

However, the government anticipates that the proposed repeal of UK to UK transfer pricing will mitigate much of the potential compliance and administrative burden on medium-sized enterprises.

Although the UK currently operates a SME exemption, many SMEs are still liable to complete full transfer pricing documentation for operations in other jurisdictions where exemptions don’t apply.

While the SME transfer pricing exemption currently provides relief from the complexities of formal compliance, similar principles are already embedded in UK tax law through the anti-profit fragmentation rules.

The government recognises that any new requirements must balance anticipated benefits with the compliance burdens placed on businesses. The government will work with stakeholders to optimise design and minimise burdens, where possible.

Question 4

3.  International Controlled Transactions Schedule (ICTS)

Accepted Answer

Introduction

Current law

In the UK, all businesses are required to keep records to make and deliver a complete and correct return. UK entities with provisions in scope of transfer pricing need to demonstrate that related party transactions have been identified and priced in accordance with Part 4 TIOPA.

The UK implemented Country-by-Country Reporting (CbCR) in 2016. The OECD designed country-by-country reports to provide tax authorities with an overall picture of the global position on profit and tax of the multinational groups operating in their jurisdiction. Information is aggregated at a jurisdictional level and used to inform high-level transfer pricing risk assessment. The CbCR requirement applies to multinationals with consolidated group revenue of at least €750 million that have 2 or more enterprises tax resident in different jurisdictions.

In 2023, the UK introduced a requirement for UK entities that are members of groups meeting the CbCR threshold to maintain a master file and local file and provide those documents to HMRC upon request. The master file contains standardised information that is relevant to all group members. The local file refers specifically to the material transactions of the local taxpayer. Both are detailed, narrative documents.

The government continues to review UK transfer pricing documentation requirements in light of practices in other jurisdictions, and to consider how HMRC compliance activity can be made more effective.

What the proposed changes are

The government is considering the introduction of a requirement for in-scope businesses to report information about certain cross-border related party transactions to HMRC. The proposed scope includes dealings between a UK-resident company and its overseas PEs, and dealings of UK PEs of foreign-resident companies.

This filing is referred to in this consultation document as the ICTS. Most major economies have a comparable requirement. The ICTS would be broadly aligned with those requirements and is designed to not introduce undue additional administrative burden.

The ICTS would collect objective data in a way which is structured and standardised. The data would be used for more efficient and accurate identification of transfer pricing and PE risk. This would allow HMRC to better focus its resources on cases where adjustments to transfer pricing are required.

Benefits and impacts

In the UK, as in other major economies, transfer pricing is a major focus of tax compliance activity. Transfer pricing enquiries are typically complex and fact-intensive, and can take considerable time and resource to resolve. Transfer pricing documentation provides tax authorities with information facilitating both pre-enquiry risk assessment and the enquiry process.

Businesses would need to establish processes for collation of the required information. They would also need to prepare and file the ICTS annually, in line with the existing Company Tax Return filing deadlines.

The primary benefit of the ICTS would be improved targeting of HMRC enquiry activity, benefitting both HMRC and compliant businesses. The data provided on the ICTS will improve risk identification and provide for better quality risk assessment. Enquiries will in turn be more efficient and streamlined due to a reduction in the initial factfinding needed on the counterparty, nature, and value of the transactions. This will allow HMRC and business resource to be more effectively deployed.

However, the government also recognises that any new requirement must balance the anticipated benefits to HMRC with the compliance burdens placed on businesses. If a UK ICTS is introduced, the government will continue to work with stakeholders to ensure that ICTS design is optimal and that any compliance burden is proportionate.

This consultation

This consultation includes a proposed scope and an illustrative template (attached at Annex B). The template outlines which transactions and dealings would be in scope and items of information an ICTS might include. The template is to illustrate the type of information expected to be requested. If the ICTS is taken forward, the government intends to develop an IT solution so that businesses can submit the information efficiently and HMRC can make effective use of it.

The government invites respondents to review the ICTS and consider the work that would likely be required to produce the information requested in the schedule. Some further questions for stakeholders to consider are listed below.

Background

Transfer pricing issues are typically complex, and their examination is fact intensive. Extensive information is required to consider the appropriate application of the arm’s length principle. A tax authority must therefore have timely access to high-quality data, for both risk assessment and audit purposes.

The Base Erosion and Profit Shifting (BEPS) Action 13 Final Report was published in 2015. Consequently, most developed economies require taxpayers to maintain or file the transfer pricing documentation outlined at Chapter 5 of the TPG. That includes the master file, local file, and CbCR. The UK introduced the obligation for businesses in scope of CbCR to maintain a master file and local file under the Transfer Pricing Records Regulations in 2023.

As a complement to this multilateral approach, many jurisdictions also require taxpayers to submit an additional form/schedule, summarising the more detailed analysis in the local file. Such forms/schedules will typically include standardised information about taxpayers’ cross-border related party transactions and transfer pricing policies.

13 of the 19 other members of the G20 have such a requirement. Of the remaining 6 members which do not have this additional reporting requirement, all bar one either mandate or incentivise regular submission of the local file to the tax authority.

In 2021, the previous government carried out a broad consultation on the UK’s transfer pricing documentation requirements. Stakeholders were asked for their views on the possible introduction of a cross-border reporting requirement, referred to as an ‘International Dealings Schedule’ (‘IDS’). While changes were not implemented at that time the summary of responses was published in November 2021.

When preparing this proposal the government has considered how the benefits of a cross-border reporting requirement might be achieved without undue additional burden on taxpayers. The government has taken stock of the 2021 summary of responses when developing these policy proposals.

Response to previous concerns

The ICTS presented at this consultation considers the concerns raised in 2021.

The government recognises the need to explain how data from the ICTS would be used by HMRC, benefits to businesses, and how the ICTS would complement existing compliance obligations. The government has considered how existing taxpayer information can be used and the relative costs and benefits of requiring aggregated data compared with line-by-line reporting.

Use of ICTS data

The information included in the ICTS would be used for automated risk identification and manual risk assessment. It is expected that risk profiles would be run on ICTS data by HMRC data analysis teams. ICTS data would also be incorporated into HMRC’s existing international tax governance processes, meaning that enquiries could not be opened without review of the ICTS by compliance teams.

Effective transfer pricing risk assessment depends on a tax authority having access to sufficient, relevant, and reliable information. However, in many cases, the only non-public information currently available to HMRC compliance teams for transfer pricing risk assessment before opening an enquiry are the contents of the tax computation and return.

Groups with consolidated revenue above €750 million are also required to file a CbCR. However, the data included in the CbCR is intentionally aggregated at a very high level. It provides a useful overview of a group’s global activity, rather than an analysis of specific intragroup transactions. Many taxpayers within the scope of the UK’s transfer pricing rules are also below the threshold for CbCR.

Currently HMRC assesses transfer pricing risk based on very limited information about the nature, volume, and pricing of intercompany transactions. In consequence, much HMRC and taxpayer time is occupied at the start of enquiries with basic fact-finding on the transactions and dealings.

This absorbs HMRC and taxpayer resource and delays enquiry progress. It may be that the outcome of the fact-finding will indicate limited risk of transfer pricing non-compliance. In such cases HMRC will look to close the enquiry after the initial fact-finding stage, with no adjustment to the filed position.

By requesting the information in the ICTS HMRC will be able to reduce the number of enquiries opened on businesses with limited transfer pricing risk and better target resource on higher risk transfer pricing arrangements. In turn, this will allow HMRC to spend less resource enquiring into compliant businesses and more resource enquiring into non-compliant businesses. This will benefit compliant businesses and help to improve HMRC’s prioritisation of risk and productivity.

HMRC is also looking to make the transfer pricing enquiry process more effective, allowing HMRC to focus more quickly on areas of material risk. By extension, these factors will allow both taxpayers and HMRC to benefit from a more efficient deployment of resource during enquiries.

The additional data provided by the ICTS will be particularly important in the context of potential changes to the SME exemption noted above. These changes bring a new population into the scope of transfer pricing rules. It will be important for HMRC to have access to good-quality data about that population to more effectively assess transfer pricing risk and target enquiries.

Existing requirements

The ICTS proposal aims to meet a need which is not met by existing transfer pricing documentation requirements. It complements these, rather than duplicating them. At the same time, it aims to make the maximum possible use of work carried out to fulfil these existing requirements. Where businesses are required to prepare a local file, it is intended that most of the information included in the ICTS will already have been collated for the local file.

The Transfer Pricing Records Regulations 2023 require businesses to maintain transfer pricing records and provide them to HMRC upon request, but not to file them. Such documentation is also neither designed nor suitable for automated risk assessment at scale. The master file and local file are intended to provide compliance teams with a relatively detailed narrative analysis of a taxpayer’s transfer pricing positions.

The information in the template at Annex B is intended to be broadly consistent with the objective and numerical aspects of the local file. Businesses in scope of the master and local file requirements should therefore largely be able to use their existing transfer pricing analysis when completing the ICTS.

The government is open to proposals on how to limit the administrative burden on businesses who already have specific transfer pricing documentation requirements. Simplifications could include allowing businesses to exclude data provided in the ICTS from the local file.

This consultation

The template included at Annex B indicates the information which the government believes would be useful in an ICTS. This includes which transactions and dealings would be in scope. If the ICTS is taken forward, the government intends to develop an IT solution so that businesses can submit the information efficiently.

The final design and format of any ICTS may change depending on feedback provided in response to this consultation and other factors. Annex B is intended solely to illustrate the proposed contents of an ICTS and therefore the data taxpayers would need to produce.

Respondents to the previous consultation suggested that any requirement should be objective and focus on material transactions. Examples of the data which respondents suggested might be included were the amount and nature of the transactions, transfer pricing methodologies applied, and counterparty details.

The ICTS is based on these suggestions. As far as possible, the data should be objective, factual, and not currently filed with HMRC on an annual basis.

The questions in this consultation cover the scope, contents, and design of the ICTS.

The government recognises that businesses are best placed to comment on what information they have available, and the work required to capture this in a given format.

Therefore, in addition to the specific questions listed below, businesses are invited to reflect on the proposed design as a whole. It may be that changes to the proposed design could reduce the compliance burden, while still providing the same or similar information. The government welcomes any suggestions towards such changes.

Scope

The government suggests the following scope for the ICTS. This is also outlined in the template for clarity.

In summary, the government proposes that the ICTS should be completed by all of the following entities with material cross-border transactions:

UK entities within the scope of Part 4 TIOPA
UK PEs of non-resident entities
UK entities with foreign PEs

Businesses would therefore be excluded from scope where they are ‘small’, as defined in section 172 TIOPA if they are exempt from transfer pricing by section 166 in the relevant period. The scope of the ICTS would be aligned to any changes to the exemption for small and medium-sized enterprises as outlined earlier in this consultation.

The government envisages that UK PEs of non-resident entities should disclose both:

transactions between the non-resident entity and associated entities, where those transactions are attributable to the UK PE
‘dealings’ between the PE and other parts of the non-resident entity

Similarly, UK-resident companies should disclose ‘dealings’ with their overseas PEs as well as transactions with overseas associated entities.

References to ‘transactions’ in the remainder of the document should be construed as incorporating the intra-entity ‘dealings’ of PEs. Such ‘dealings’ should also be included when determining whether the transaction-based thresholds below are met.

The government acknowledges that PE dealings may not be documented in the same way as transactions between associated entities. The government therefore welcomes assessments of any additional difficulties involved in extending the requirement to PEs, and suggestions regarding how these might be mitigated.

Notwithstanding the above, there is no requirement for the following transaction types to be reported in the ICTS:

UK to UK related party transactions
transactions covered by an Advance Pricing Agreement (APA) in the relevant period
dividends receivable that are exempt from tax in accordance with Part 9A CTA 10

Those transaction types would also be excluded from the calculation of the thresholds set out in the section below.

Question 11: The government welcomes views on the suggested scope of the ICTS requirement. In particular, the government welcomes comments on the proposed application of the requirement to PEs.

Thresholds

In addition to the scoping criteria above, the government proposes a further exclusion from scope based on total aggregate value of relevant transactions with qualifying territories. This approach is intended to exclude businesses with limited practical risk of profit diversion from the scope of the ICTS.

This proposal would be subject to any changes to the definition of qualifying territories at section 173 TIOPA outlined earlier in this consultation. The limit will apply by reference to the arm’s length price of the transactions.

Businesses will not be required to complete the ICTS where both of the following criteria are met:

there are no transactions with non-qualifying territories
the aggregated total value of transactions with qualifying territories is below £1 million

The £1 million threshold would apply to the individual entity rather than the corporate group. The aggregate value would be the sum of income and expenses, amounts should not be netted off against one another. To illustrate its application, an entity with related party income of £3 million and related party expenses of £3 million would have a total aggregated value of £6 million.

Most of the members of the G20 with a similar reporting requirement adopt an aggregated transactions value threshold that is equal to or lower than £1 million (if they offer any).

The government also welcomes comments or suggestions on whether using multiple thresholds (entity size, total transactions, and de minimis) or alternative thresholds would be preferable. These could make the requirement less burdensome by restricting its application. However, businesses would need to perform multiple levels of analysis in order to determine whether they are within scope.

Question 12: The government welcomes views on the proposed exemption from the ICTS requirement where the total aggregated value of relevant cross-border related-party transactions is below £1 million. Views on whether multiple or alternative thresholds would be preferable are invited.

Tabular analysis

The template includes a table for the disclosure of related party transactions (Section A). A separate table for information about loan relationships is also included (Section B).

The information requested in Section A is broadly aligned with equivalent requirements in other jurisdictions. The columns indicate the items of information that should be provided. The information is intended to be objective and either quantitative or discrete, with limited/no narrative or subjective element.

All overseas equivalents include some form of analysis by transaction type. Therefore, a similar list of possible types is proposed here (column B).

The transaction types in Section A are grouped by subject area (such as intangibles/services). They are based upon equivalents in other jurisdictions, and aim to provide sufficient detail for meaningful transfer pricing risk analysis. Each subject area includes an ‘other’ type, for related party transactions which do not fall within the types listed.

The list of types includes an item for tracking the net book value of intangibles acquired or disposed of. The net book value, where relevant, would be disclosed in column I, whereas amounts of income and expenditure for all other items should be disclosed in columns J or K. There is a similar requirement for tangible fixed assets.

The list of types includes an option for white-space notes. These are designed for taxpayers to use, should they wish to provide any further information in relation to a particular item in Section A. Use of the white box space is entirely optional, and there is no obligation for any further information to be provided.

At the previous consultation, stakeholders indicated that aggregation of transactions would help to mitigate the burden involved in preparing the filing. Section A therefore includes a proposed method of aggregation (rows 29 to 30). Transactions could be aggregated on a single line where they share the features outlined in all of the columns listed as aggregation factors.

The suggested aggregation factors are: transaction type, counterparty identity, counterparty jurisdiction of residency/PE, currency, transfer pricing or valuation method, profit level indicator, and percentage (where applicable). For example, a counterparty business resident in Country A with a PE in Country B of that business resident in Country A would be treated as having separate counterparties, in separate jurisdictions. Therefore, transactions with the two could not be aggregated and would need to be disclosed separately.

Income and expenditure in a category should be shown separately, and not netted off against one another. The figures in the ICTS should be those in the financial statements, subject to any adjustment for arm’s length pricing under transfer pricing principles.

It is intended that transactions would not need to be disclosed where the total value of the category (aggregated as above) is less than a de minimis of £100,000. Income and expenditure within a category should be added together when determining whether the de minimis is met. Most of the members of the G20 that operate a similar reporting requirement as the proposed ICTS have a similar or lower de minimis threshold.

The government considers that a higher de minimis threshold may be appropriate for businesses in scope of the Transfer Pricing Records Regulations 2023. For example, a £1 million de minimis would increase alignment with HMRC’s local file guidance and may better reflect the scale of those businesses. Other members of the G20 that operate a similar reporting requirement as the proposed ICTS do not operate a higher de minimis threshold for their equivalent CbCR filing population. However, the government considers that a higher de minimis threshold may be more suitable when taking account of both the existing and upcoming reporting obligations for that population, for example CbCR, local and master files, and Pillar 2.

The analysis of loan relationships is included separately in Section B, as a necessary complement to the information about financing transactions in the main analysis. The information requested in the columns is similar to that in Section A but tailored to useful information for risk identification of financing transactions.

A two-part de minimis of £5 million (loan balance) and £100,000 (impact on profits and losses) is suggested for loan relationships. For businesses that are currently within the scope of the Transfer Pricing Records Regulations 2023 a higher de minimis of £50 million (loan balance) and £1 million (impact on profits and losses) may be more suitable.

The proposed aggregation factors for Section B are transaction type, counterparty identity and jurisdiction, currency (rows 93 to 94). This allows greater aggregation than permitted under Section A, to reflect the high volume of financing transactions for certain sectors and types of entity.

However, to ensure that HMRC can identify the most significant financing transaction risks, further information is requested on the top 5 loan relationship transactions or dealings by value of in-year impact on profits and losses. Visibility of the top 5 transactions or dealings without aggregation will significantly improve HMRC’s ability to detect risk in this area efficiently.

Question 13: The government welcomes any comments or suggestions on the proposed tabular analysis, including both the transaction analysis in Section A and the loan relationship disclosure in Section B.

Question 14: The government welcomes any comments or suggestions on whether the items of information requested appear reasonable and proportionate, in light of the policy intention to improve risk identification and risk assessment. In addition, are there any other items of information which would be useful for HMRC to have at the time of risk assessment?

Question 15: The government welcomes views about the ability to extract the information suggested from businesses’ existing records and systems. Could any changes be made to the template to make collation of data easier, while still extracting fundamentally similar data?

Question 16: The government welcomes any comments or suggestions on the proposed approach to aggregation.

Question 17: The government welcomes any comments or suggestions on whether the de minimis thresholds suggested appear reasonable.

Question list

The template also includes a short list of questions at Section C, covering various matters relevant to assessing transfer pricing and PE risk.

As with the tables, the information covered by the question list is intended to be factual, objective, and either discrete or quantitative. The majority of the questions require binary answers only.

It may be that taxpayers feel further narrative clarification is needed regarding their response to one or more of the questions in the list. The white-box spaces mentioned above would allow this, but are not intended to be mandatory for any item.

Question 18: The government welcomes views on the proposed question list in Section C, including any suggestions of additional information which would be useful for HMRC to have during risk assessment.

Question 19: The government welcomes any other comments, suggestions, or feedback on the proposed scope of the ITCS requirement and template.

Question 5

4.  Assessment of impacts

Accepted Answer

Summary of impacts

Year	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Exchequer impact (£m)	Nil	Nil	Nil	Nil	Nil	Nil

Exchequer Impact Assessment

Impacts	Comment
Economic impact	The economic impacts will be identified following consultation and final design of the policy measures.
Impact on individuals, households and families	These measures are not expected to have any impact on individuals, as they only affect businesses.
Equalities impacts	It is not anticipated that there will be impacts on those in groups sharing protected characteristics. A full equality impact assessment is not recommended.
Impact on businesses and Civil Society Organisations	Amendments to the SME exemption and the ICTS are considered separately (notes).
Impact on HMRC or other public sector delivery organisations	As this is a public consultation, there is no HMRC operational impact at this stage of the process. Full HMRC operational impact will be assessed once policy design is known. The public consultation process will be handled by relevant departmental staff as part of business as usual activities.
Other impacts	None

Notes:

Amendments to the SME exemption:

This measure is expected to have an impact in future on medium-sized businesses not currently within transfer pricing, as it is currently at the stage of public consultation. One-off costs could include familiarisation with transfer pricing rules. Ongoing costs could include more detailed review of certain transactions when preparing the tax return.

This measure is expected overall to have a small negative effect on some businesses’ experience of dealing with HMRC, as they may be required to carry out additional review of certain transactions in order to ensure that they are complying with the UK’s transfer pricing rules, and incur additional costs as a result. HMRC will provide clear guidance to assist businesses with transfer pricing compliance. For most businesses within the scope of the legislative change, the volume of affected transactions is likely to be minimal.

International Controlled Transaction Schedule (ICTS):

This measure is expected to have an impact in future on medium and large UK businesses with material overseas related party transactions, as it is currently at the stage of public consultation. One-off costs could include training and upskilling staff, familiarisation with new processes, and IT costs. Ongoing costs could include recording more information and providing this information to HMRC.

This measure is expected overall to have a small negative effect on some businesses’ experience of dealing with HMRC, as they will be required to complete additional admin and may incur additional costs. HMRC will work with businesses in the course of policy design to mitigate admin burdens and will provide clear guidance to assist businesses with completing the form.

Some civil society organisations could fall within the scope of transfer pricing legislation, but the impact of these measures on civil society organisations is likely to be negligible given this is a policy consultation.

Question 6

5.  Summary of consultation questions

Accepted Answer

Exemption for small and medium-sized enterprises

Question 1: The government welcomes views on the proposal to maintain an exemption from transfer pricing for small enterprises.

Question 2: The government welcomes views on the proposal to continue to define small enterprises by reference to turnover, balance sheet total, and staff headcount. Views are also invited on whether alternative metrics or approaches would be preferable.

Question 3: The government welcomes views on the proposed amendment of the small enterprise threshold from €10 million turnover and balance sheet total to £10 million turnover and balance sheet total.

Question 4: The government welcomes views on the proposal to only change the status of a small enterprise where the threshold is exceeded in two consecutive periods.

Question 5: The government welcomes views on the proposal to remove the exemption for medium-sized enterprises from transfer pricing.

Question 6: The government welcomes views on proposals relating to exceptions to the SME exemption, including whether the non-qualifying territory exception should be reviewed.