Policy paper

Transfer pricing documentation

Published 20 July 2022

Who is likely to be affected

This measure will primarily affect large multinational businesses, as well as, potentially, individuals with ownership interests in these.

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:

• a master file containing standardised information relevant for all multinational enterprise group members
• a local file referring specifically to material transactions of the local taxpayer
• a Country-by-Country report for the largest multinational enterprise 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 Country-by-Country minimum standard but did not introduce specific requirements regarding 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 of 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 will prescribe the format in which this should be done.

Additionally, the measure will also introduce a “summary audit trail” (SAT) requirement. This means that businesses must 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 transfer pricing documentation in a set, OECD standardised, format.

Accessing high quality data in a standardised format would 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.

Similarly, as a result of having to clearly report transfer pricing information within documentation, businesses will often as a result have a clearer and more robust transfer pricing position to inform the filing of the Corporation Tax return, and this may encourage and incentivise businesses that adopt higher risk transfer pricing positions to change their behaviour.

Background to the measure

A consultation for this measure was published on 23 March 2021, with this closing for comments on 1 June 2021.

A response to this consultation was published on Tax Administration and Maintenance Day 2021 (30 November 2021). This announced that we would consult on draft legislation for the measure in 2022 and that the legislation would then take effect from April 2023.

Detailed proposal

Operative date

This measure will apply from 1 April 2023. It will apply to businesses with accounting periods commencing on or after 1 April 2023.

Current law

Current law on record keeping for companies is contained in paragraph 21 of Schedule 18 to Finance Act 1998. Current law on record keeping for individuals and partnerships is contained in section 12B of the Taxes Management Act 1970.

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

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

Proposed revisions

The main revisions are those which are being made to paragraph 21 of Schedule 18 to Finance Act 1998 and section 12B of the 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, local file and summary audit trail questionnaire documents must be kept and preserved.

Revisions are also being made to Schedule 36 to 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 to Finance Act 1998 and section 12B of the Taxes and Management Act 1970 powers, as well as the means by which, and the form in which, these are provided. 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.

Finally, revisions are being made to Schedule 24 to 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 is careless. The relevant taxpayer can only displace this presumption by providing the documents and evidencing the underlying transfer pricing information had been prepared in advance of filing their Corporation Tax return, or otherwise showing they took reasonable care.

Summary of impacts

Exchequer impact (£million)

2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Empty	Empty	Empty	Empty	Empty	Empty

The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at a future fiscal event.

Economic impact

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

Impact on individuals, households and families

This measure will impact on very few individuals who are within scope of transfer pricing legislation (primarily impacting large multinational businesses) by requiring transfer pricing documentation to be maintained in line with updated guidance. These individuals will now need to ensure their transfer pricing documentation is prepared 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 anticipated that there will be impacts on those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on an approximately 3,500 businesses by formally requiring transfer pricing documentation to be maintained 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 (£million) (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.