Global Tax AlertHMRC Announce Upcoming Changes to Transfer Pricing Documentation Requirements
HMRC has announced new requirements for master file (MF) and local file (LF) documentation, in line with the Organisation for Economic Co-operation and Development (OECD) standardised approach. On 30 November 2021, the government published a summary of responses to their March consultation on Transfer pricing documentation, as well as their conclusions and next steps. The consultation explored whether the largest businesses with a presence in the UK should be required to maintain, and produce upon request, MF and LF documentation.
The announcement is a major shift in documentation legislation, as current documentation requirements are governed only by non-specific legislative record keeping requirements to keep certain records needed to deliver correct and complete returns. However, it is important for taxpayers to bear in mind that mere compliance with the new documentation standards may not be sufficient to avoid onerous enquiries or to ensure penalty protection.
In this alert we summarise our observations on the new requirements.
The MF and LF requirements will be based on BEPS Action 13 recommendations. Currently, documentation requirements are expected to apply only to those groups who are subject to country-by-country reporting (CbCR) requirements. Action 13 provides a template for required information, and we do not expect UK requirements will deviate from this template. However, we strongly encourage groups to consider additional UK-specific fact finding when preparing the local file. HMRC have noted that the lack of UK-specific information in documentation reports as an indicator that the taxpayer has failed to take reasonable care in preparation of their tax return. Customising the report to incorporate UK-specific facts rather than taking a generalised approach across jurisdictions for entities with similar characterisations is preferred. The former approach is unlikely to provide penalty protection in cases where UK entities are found to have additional functionality during an enquiry. If such customisation is not feasible, we recommend the taxpayer maintain a separate defence file with this information to demonstrate reasonable care.
Taxpayers will have 30 days upon request to produce documentation. The government has opted for a short window of time to produce documentation upon request, reasoning that the taxpayer would need to have this data available to prepare the tax return. HMRC is likely to interpret deviation from this timeline to be an indication that the taxpayer has failed to take reasonable care in filing their tax return, leading to potential penalties as well as opening additional years for assessment beyond normal 4-year time limits.
A separate “Summary Audit Trail” document will be required to accompany the MF and LF. This requirement replaces HMRC’s initial proposal for an evidence log to accompany the documentation, as feedback indicated this took documentation too far into investigative territory, as an evidence log is a key requirement of the Profit Diversion Compliance Facility (PDCF). Although HMRC have yet to provide guidance on what should be included in this separate document, it is likely that it will provide the government with the information necessary to identify high risk areas during an enquiry. While HMRC have scaled back their initial proposal, we recommend that taxpayers consider assembling the information required in a PDCF evidence log while preparing documentation or other defence files.
Draft legislation will be introduced in 2022, with changes to take effect from April 2023. We are likely to see HMRC issue additional guidance to refine these requirements in the meantime.
Please contact the authors or your usual DLA Piper advisors if you need further advice on dealing with the impact of these documentation changes or to prepare additional internal defence files.