New rules apply for larger groups with effect from 1 April 2023 with stricter requirements on supporting documentation to be maintained in relation to transfer pricing.
The rules will apply to large multinational enterprises (MNEs) with a UK presence that have annual group consolidated turnover in excess of €750 million.
The current rules only require groups to have ‘sufficient documentation’ in support of their transfer pricing policy. However, for accounting periods beginning on or after 1 April 2023, there will be a standardised approach for transfer pricing documentation which all larger MNEs (that exceed the turnover threshold) will be required to maintain including:
- Master file – to include an overview of the group’s business and nature of its operations, its overall transfer pricing policies, along with its global allocation of income and economic activity.
- Local country files – detailing any material intercompany transactions and transfer pricing positions taken between the UK company(ies) and any overseas affiliates. This should include relevant financial information, comparability analysis and selection method for the most suitable transfer pricing method.
This compliance requirement is in addition to country-by-country reporting which has already been implemented for larger MNEs.
The legislation provides that the group must prepare the relevant documentation in advance of filing its UK corporation tax return for the relevant year should be made available to HMRC on request and within 30 days.
Failure to maintain the prescribed documentation may lead to higher penalties where an inaccuracy is discovered, as HMRC will likely determine that this was due to careless behaviour and that reasonable care has not been taken.
Action to take
In preparation for the rules taking effect, the following actions are recommended:
- Identify any material intercompany transactions between UK and overseas companies that require transfer pricing documentation and assess the value of those transactions. It should be noted that UK to UK transactions, in general do not need to be considered, however, if one of the entities has elected into the Patent Box or is subject to a ring fence trade, then they will come within the scope of the rules.
- Review existing transfer pricing documentation in place and ascertain any updates/additional documentation required to ensure that they comply with the OECD Transfer Pricing Guidelines.
- Review current transfer pricing strategies and processes to determine if they are appropriate and make changes/updates as appropriate.
Further requirements
The draft regulations also provided that a ‘summary audit trail’ will be required but this has now been delayed until later in 2023. This document will essentially comprise of a questionnaire confirming the main actions the group has taken in preparing the local country file documentation.
If you would like any further information or assistance, please get in touch with Bruce Black on 01242 237661.