Master and Local Files Required in the UK: Are You Ready?
A diverted profits tax. A diversion profits compliance facility. And yet no official master and local transfer pricing documentation requirements. It’s almost like HMRC wanted multinational companies to endure transfer pricing troubles. Of course, that’s about to change with the UK’s recent adoption of BEPS Action 13’s master and local file requirements, which take effect in April 2023. The proposals mean more burdensome compliance complexity for large multinationals (annual global revenue of at least EUR 750 million) but could also pave the way for more tax certainty in a very uncertain environment.
Now, large taxpayers will be required to produce a master file, a local file, and a summary audit trail (SAT) questionnaire—that’s in addition to the already required country-by-country report. Should your organization be requested to produce these documents, you will have 30 days to do it.
How can you prepare for the UK’s new regs? Here, we offer a few pointers.
Know who you’re dealing with. HMRC is well aware of the potential revenue that could be generated from transfer pricing adjustments and penalties. In fact, between tax years FY2015/16 and FY2019/20, HRMC generated more than £6 billion in additional tax revenue from transfer pricing compliance activities. In tax years FY2020/21 alone, there was a record transfer pricing yield of £2.1 billion. And in November 2020, the government announced that 2,000 of the largest UK businesses may owe an additional €34.8 billion in back tax, suspicious that local profits don’t accurately represent the value created in the UK. Bottom line: HMRC is formalizing transfer pricing legislation to regulate transfer pricing and hold multinational businesses accountable.
Remember time is not on your side. Should you be required to produce the master file, local file, and SAT questionnaire, having only 30 days means you’re operating on a tight deadline. A month is hardly enough time to prepare a master and local file from scratch and when you factor in the SAT questionnaire—and the fact that you’re dealing with HMRC—well, let’s just say, a rush job isn’t going to do it. Failure to produce the documents—or even insufficient documentation–could lead to penalties and open the possibility for HMRC to issue a transfer pricing adjustment, which could be costly. So, plan ahead and document transactions as you go.
Produce contemporaneous documentation. HMRC may be targeting large companies, but smaller companies below the CBCR threshold would also be wise to document transfer pricing transactions in real time and have documentation ready and waiting by the time the tax return is due. Given that HMRC has been less prescriptive in the past, many UK taxpayers may not have contemporaneous documentation in place—instead, they may have a report that’s two or three years old because that’s what’s been acceptable before. But read the room: HMRC is clearly telling taxpayers that what worked in the past is not going to fly now.
Think of the audit trail. If there’s one way to show HMRC that your transfer pricing is on the up and up, it’s to be consistent—and that means, your transfer pricing documentation, intercompany agreements, and transfer pricing policies should all tell the same story. For instance, if you have a management agreement, make sure your documentation reflects the terms of the agreement, and obviously, you want to make sure that all agreements reflect the reality of how your company does business today as opposed to how it operated 10 years ago.
Local comparables are your friend. The rules may be changing, but local comparables are still important to HMRC. So, if you’re using comparable uncontrolled price (CUP) data, make sure you’re looking at UK companies. Localize as much as possible to strengthen your transfer pricing position.
Now get ready. Preparedness and a good documentation game plan can go a long way to reduce the risk of an audit and potential transfer pricing adjustments, not only in the UK but in every jurisdiction around the world. Is your game plan a solid one? Now’s the time to find out.