New Transfer Pricing documentation rules

From 1 April 2023 the largest international Groups (with Group turnover of more than Euro 750m) are now required to maintain transfer pricing documentation in a set OECD standardised Master File and Local File format. 

In addition the UK is introducing an extra requirement called a “summary audit trail” (SAT). This means that businesses must complete a questionnaire detailing the main actions they have taken in preparing the Transfer Pricing Local File. The precise format of this SAT is still to be announced but we would expect that it may need to include the details of when a functional analysis (FAR) was prepared, what fact-finding interviews were carried out and with whom, and how often the FAR has been looked at (which should be annually as a minimum or as and when there are significant changes in the business).

HMRC will continue their consultation and we are expecting them to issue further technical papers in 2023 which will provide HMRC’s view on best practice and answer practical questions, such as, how to determine whether a controlled transaction should be reported in the Local File and how a group can approach consolidation for their TP documentation to avoid unnecessary duplication of effort.

Reasons for change

In introducing these measures, HMRC’s stated policy objective is that accessing high quality data in a standardised format enables 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.

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We would expect that companies will need to provide the SAT as part of any formal documentation request/enquiry by HMRC so that HMRC can consider the specific steps that were undertaken during the preparation of the Local File and whether these were adequate. 

What actions should you take?

If the Group is above the Euro 750m Turnover threshold, TP documentation in this prescribed format will be required for any accounting period starting after 1 April 2023. There is still plenty of time for businesses to start planning and to consider where to best focus their efforts. HMRC will perhaps be most interested to understand whether local fact finding and a FAR is considered on a regular basis and that appropriate people within the business are interviewed in the preparation of the TP documentation.

As a small UK company that is part of a large international Group, it may be that TP documentation has always been considered and dealt with by a different part of the Group. The UK company nevertheless has a responsibility for ensuring that a Master File and UK Local File is prepared and maintained in the UK and this should be in place at the time the UK corporation tax return is filed.

For any Group that is not above the threshold then it is still often advisable to prepare the documentation in this format as it may be required in other jurisdictions in which the Group operate and using this format should mitigate the risk of detailed enquiries from Global Tax Authorities. Although more generally in the UK TP rules, there is an exemption for small and medium sized UK businesses, there are many countries without an SME exemption (e.g. the USA).

At Menzies we offer bespoke Transfer Pricing services and can review your transfer pricing policies for tax efficiency as well as ensuring that your documentation is fit for purpose and compliant with the latest rules. We never just consider transfer pricing in isolation given its impact on wider tax areas (e.g., withholding taxes, global mobility and customs duty to name but a few) and we work with other firms in the HLB Network to ensure all your international tax needs are covered. We will continue to monitor and report back on the Transfer Pricing public consultation during 2023.

For a discussion on how transfer pricing rules impact your business please get in touch with your usual Menzies contact or contact Emma McCartney.

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