22 Feb 2023

Transfer pricing documentation changes

Unlike many other economies, the UK tax code does not explicitly require UK businesses to prepare and maintain transfer pricing documentation in an OECD standard format.

Of course, many large groups do prepare such documentation, since this is recommended as best practice, but the lack of any specific requirement creates a degree of uncertainty for UK business regarding what it considered to be sufficient transfer pricing documentation.

The Government has been consulting on formal transfer pricing documentation requirements that will be introduced for large businesses for accounting periods beginning on or after 1 April 2023.

What changes are being introduced? 

Following consultation on the draft legislation in the last two years, the Government published a draft statutory instrument in December 2022 to introduce the transfer pricing documentation requirements.

The rules are broadly as expected insofar as they apply to multinational enterprises (MNEs) with consolidated turnover of €750m or more, operating in the UK, to keep and maintain a master file and local file in accordance with the OECD transfer pricing guidelines.

Earlier drafts of the legislation also included a requirement for an accompanying summary audit trail (SAT), but this has now been delayed, pending further public consultation in 2023. The SAT would require the taxpayer to provide additional information regarding the work that they have undertaken in arriving at the conclusions set out in their transfer pricing documentation. This would represent an additional obligation beyond the standard set out in the OECD transfer pricing guidelines.

The latest legislation also includes a local file exemption for UK-UK transactions, but it is important to note that this exemption does not apply where one of the parties to the transaction has elected into the patent box regime or is carrying on a ring fence trade (i.e. oil and gas extraction on the UK continental shelf).

What does this mean for you?

Whilst the legislation is still in draft form, it is clear that MNEs operating in the UK will be required to prepare and maintain master file and local files in accordance with the OECD transfer pricing guidelines.

It is expected that many large groups with UK entities will already be preparing suitable transfer pricing documentation, since this is best practice. We would recommended that all MNEs revisit their UK transfer pricing documentation and ensure that appropriate revisions are made to ensure that their documentation is compliant with the rules being introduced with effect for accounting periods beginning on or after 1 April 2023.

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