The draft transfer pricing legislation from the UK government is expected to add more documentation requirements, which will make it more difficult for businesses to comply.
According to HM Revenue and Customs' draft legislation, which was released on Wednesday, July 20, businesses operating in the UK will be fined if they do not provide adequate transfer pricing documentation.
Following final reviews, the legislation—which also complies with OECD recommendations—is scheduled to take effect on April 1st, 2023.
The audit trail will now be required from businesses in addition to the local and master file.
While the local file refers to significant transactions involving local taxpayers, the master file contains information pertinent to members of multinational groups.
Businesses will need to submit a brief questionnaire that details the steps they took to prepare the local file as part of the summary audit trail.
The scope of the requirements would be the same as the country-by-country reporting regime, which would only apply to multinational corporations with global revenues exceeding €750 million ($765 million).
With the introduction of this draft legislation, the UK is attempting to further align with OECD standards as it recognizes the need for increased tax certainty for its taxpayers.
According to the paper, TP guidance would enable HMRC to conduct "more informed risk assessments" and "target resources efficiently" while shortening the time required for investigations.
The announcement from HMRC did not come as a surprise, according to Rachit Agarwal, TP director at the London office of the law firm DLA Piper, as the UK was "one of the very few countries without formal documentation requirements."
According to Agarwal, the majority of taxpayers who fall under the scope would have been ready for the changes before the draft legislation was published.
“I don’t think it’s a surprising development as most multinationals are already preparing global documentation and now the UK would just be added to the list,” he said.
"Given that the master file and local file are based on OECD standards, it should not be a heavy lift as same global templates could be followed. The most interesting requirement is the summary audit trail document where additional guidance would be needed," Agarwal continued.
Ben Semper, tax director at accounting firm Mazars in the UK, agreed with Agarwal that the draft legislation from HMRC was lacking in specifics regarding the summary audit trail.
“It looks like it will be a prescribed checklist. It’s going to be useful to get visibility on that soon,” he stated.
The audit trail still has not given the tax authority additional audit quality, a problem that the UK had been attempting to address in TP reports.
In the event of a TP adjustment, the draft legislation reiterates that businesses within scope who fail to provide a master file and local file upon request - that is, at the time of the tax return - will be subject to a penalty and fine.
The penalty regime in the draft, according to Semper, was a "big surprise" because it was not mentioned in the consultation paper.
HMRC's proposed changes to its TP documentation requirements were made public in March of last year, and a public consultation that followed ended in June 2021.
By fLEXI tEAM