Changes ahead for UK transfer pricing documentation

12.5.2021

Her Majesty’s Revenue and Customs (HMRC), the UK’s tax authority, has asked for comments on proposed changes to its transfer pricing rules. The consultation period is relatively short – with a June 1 deadline.

While the proposed changes would align the UK’s current rules more closely with the documentation requirements of other jurisdiction and with the BEPS Action 13 Report, they also contain some novel features.

The main changes would be:

Introduction of mandatory master file and local file requirements for UK multinational enterprises (MNEs) within the scope of Country-by-Country (CbC) reporting requirements.
Introduction additional disclosures about cross-border transactions with associated enterprises to be included in an International Dealings Schedule (IDS) as a part of annual tax return for firms within the scope of UK transfer pricing rules.
Potential use of an “evidence log” or similar document as mean of identifying key facts and evidence.

Master file and local file

HMRC is considering a mandatory master file and local file requirement for UK MNEs within the CbC reporting group (i.e., a group which consolidated revenue is over EUR 750 million) to obtain or prepare a master file as well as a local file, which would have to be provided to HMRC within 30 days after a request.

Bringing in the formal rules for Action 13 master and local files would align the UK with many other countries, and for some MNEs already producing master files and local files, the changes may not create concerns.

International Dealings Schedule

HMRC has proposed an introduction of an IDS to report transactional date about intragroup cross-border transactions which would be used by HMRC to identify transfer pricing risks more accurately. All UK businesses within the scope of UK transfer pricing legislation, which generally excludes small and medium-sized enterprises, would be required to file an IDS as part of annual tax return under current proposals.

The scope of reporting would include, among others the nature and amount of transactions, counterparty details for transactions, information on the TP methodologies applied, information on restructuring activity and details of financial dealings.

The suggested list of data that might be required by HMRC is extensive and raises concerns about the potential burden of MNEs as well as the subjective nature of some of the data requested and its relevance to risk profiling.

Evidence log

As part of the proposals covering master file and local file, HMRC has suggested that it would like to explore the benefits of requiring the local file to be supported by some form of evidence log setting out key facts, potentially as an appendix to local file documentation. The evidence log could include e.g. copies of emails, notes of interviews with employees and evidence from customers. The introduction of an evidence log for all MNEs would be a novel step beyond the scope of BEPS Action 13. It is expected that compiling and maintaining an evidence log for UK-related transactions could create significant compliance burden for many MNEs.

More information in PwC’s Tax Insights bulletin