HMRC Consultation on New Mandatory TP Documentation

On 23 March 2021, HMRC issued a consultation document on proposals to introduce new mandatory requirements for TP documentation.

By way of background, the consultation document notes that in the last 5 years (2015/16 to 2019/20), HMRC has brought in over £6 billion in additional tax from transfer pricing compliance activities. Transfer pricing therefore continues to be a significant area of tax risk for HMRC and for large businesses.

UK businesses are already required to keep records to demonstrate that their tax returns are complete and accurate, including in respect of any figures affected by the transfer pricing rules. However, HMRC does not generally prescribe specific records that UK businesses must prepare or the format of those records. In particular, TP master files and local files have not been mandatory in the UK to date.

In that respect, HMRC’s current approach to transfer pricing documentation requirements is not aligned with that of other tax authorities.

The proposals on which HMRC is seeking views include the following:

• a mandatory requirement for MNEs within CbC reporting groups to provide HMRC with a copy of the master file and a local file on request;
• a 30-day deadline for the production of these documents;
• requiring the local file to be supported by an evidence log setting out key facts, potentially as an appendix to local file documentation;
• the mandatory annual filing of an ‘international dealings schedule’ (IDS), providing information on transactions between associated enterprises.

HMRC notes that “a common difficulty in transfer pricing enquiries relates to distinguishing underlying facts and evidence from technical opinions.” These proposals are intended to provide greater transparency on evidence underpinning the facts.

As the consultation notes, most corporates within the scope of CBC reporting will already be preparing TP master files and local files anyway. But few advisers or taxpayers will welcome the introduction of new, country-specific requirements for TP documentation which go beyond OECD requirements.

From a global perspective, this consultation arguably reflects the general trend for tax administrations to require more coherence in TP policies and more evidence regarding their implementation – including the legal terms of intercompany transactions as documented in intercompany agreements, in line with OECD requirements.

The deadline for submissions in response to the consultation is 1 June 2021.

You can access the consultation document here.