On 23 March 2021 the UK government published a consultation paper on transfer pricing documentation. The closing date for comments is 1 June 2021.

Following the final report on Action 13 of the OECD Action Plan on base erosion and profit shifting (BEPS) in 2015 the UK adopted the minimum standard for transfer pricing documentation, leading to the introduction of country by country (CbC) reporting. As five years have passed since the adoption of the minimum standard the UK is consulting interested parties on whether the level of implementation of the standard is adequate for the requirements of HMRC and business.

The consultation document sets out the case for strengthening the UK transfer pricing documentation requirements to align UK practice more closely with that of other comparable tax administrations and to provide better data to HMRC and more certainty to taxpayers.

The document proposes a requirement for UK business subject to the documentation requirements to keep specific documentation to support their transfer pricing position, and to submit an annual International Dealings Schedule with the tax return, detailing of material cross-border related party transactions.

Currently the UK transfer pricing rules do not set out specific records that UK businesses should prepare but require sufficient documentation to demonstrate the completeness and accuracy of their tax returns. The new proposals would require businesses to keep certain transfer pricing information in standardised formats.

The OECD’s standardised approach included a master file containing relevant details of the group to which the taxpayer belongs; a local file with details of relevant transactions of the taxpayer; and a CbC report with aggregate data in relation to the global allocation of income, profit, taxes paid and economic activity in the countries in which the group operates.

In 2015 the UK implemented the minimum standard in relation to CbC reporting but did not bring in specific requirements for the master and local files as broad record keeping requirements already existed.

An ability to access higher quality data would however permit HMRC to better carry out data-driven risk assessment and taxpayer profiling, thereby targeting their resources more effectively and reducing the time required to access information.

The annual International Dealings Schedule to be sent in with the tax return would include information such as the nature and amount of specific types of relevant transactions; financial dealings; details of any business restructurings; information on the transfer pricing methods used; information on the level and type of supporting documentation for the transfer pricing methods; the identity and details of the other parties to the transactions; and corporate group information.

By consulting with business the government can compare the benefits of the proposed changes with the impact that the requirements would have on business. The impact will be reduced if the proposed legislation would be formalising what businesses are already doing; or are already required to do in other countries. The changes can be designed in a way that reduces the impact on business.