As part of UK ‘Tax Day’ on 23 March, the UK government announced its proposal to formally adopt OECD BEPS Action 13, a three-tiered approach to transfer pricing documentation to encourage a global standardised approach that multinational businesses would be expected to follow, as a mandatory requirement.
These new measures are unlikely to have a significant impact on large multinationals, as they have already adopted similar practices for some time. Small multinationals, on the other hand, could see a bigger compliance burden as they were previously able to take more practical and proportionate approaches to meet their designated standards.
It is notable that HMRC’s Profit Diversion Compliance Facility considers UK local files, which refer specifically to material transactions of the local taxpayer. The government is inviting comments on the use of ‘evidence logs’ to support documentation. HMRC’s fundamental concern has been transfer pricing documentation, citing conclusions that have been stated without capturing and analysing the local functional analysis and facts.
The government has also proposed a report of intercompany transactions with tax returns, following a model used in the US and other countries (an IDS: international dealings schedule). This would likely enhance HMRC’s data analytics and enable more targeted, risk-based transfer pricing enquiries. We might therefore expect a greater likelihood of HMRC scrutiny of transfer pricing policies and an increase in enquiry activity if implemented.
The £6 billion in taxes collected between 2015 to 2016 and 2018 to 2019 through HMRC transfer pricing compliance activities have undoubtedly contributed to these changes, particularly in the context of recent government borrowing in response to Covid-19.
Mazars UK and international transfer pricing teams are here to help you prepare for these changes and will be delighted to answer any questions you may have.