Ken Almand and John McNamara consider the implications of proposed changes to compliance rules.
£6 billion. That is the additional tax that HMRC say they have brought in as a result of their enquiries into transfer pricing over the last 5 years. It seems that they believe there is more to come as they have announced a consultation on new rules to strengthen transfer pricing compliance. If these proposals become law – and judging by recent HMRC consultations they are unlikely to change much – then they will represent a more onerous compliance regime for many businesses in the UK and reflect HMRC’s data-led approach to risk assessing.
The consultation was published on 23 March 2021 and is open until 1 June 2021. We explore some of the proposed changes below.
For a start, the proposals do not so much strengthen the existing legal obligations to keep transfer pricing documentation, as create an obligation. This is because the existing law, curiously, does not explicitly require that documentation is kept. The proposals will therefore effectively mean that for the first time a transfer pricing master file and UK local file will be mandatory for the largest multinationals and subject to a 30 day submission requirement if requested by HMRC.
The consultation requirement for large businesses (group turnover of €750m or more) to keep a master file and UK local file is not the big news however, as most businesses that are impacted will already be doing this.
Instead, the two proposals which are likely to result in most debate are the introduction of an “evidence log” for the UK local file and an “International Dealings Schedule (IDS)”.
The evidence log in particular goes beyond what is required by other countries. In effect, HMRC will be mandating corporate taxpayers to provide evidence to support the facts provided in the local file. This reflects the more investigative approach that we have been seeing from HMRC on other initiatives such as Diverted Profits Tax (DPT) and the Profit Diversion Compliance Facility (PDCF). The evidence log would identify key facts and evidence such as contractual agreements and staff profiles and distinguish these from technical analysis and opinion. Transfer pricing compliance strategies will need to be changed to accommodate the fact gathering processes needed to collate and document the information required.
The IDS would be in a standardised format which HMRC could analyse and interrogate by developing the automated risk assessing tools already applied to Country by Country Reporting (CbCR). It is proposed that the IDS could include details of financial dealings, the nature and amount of specific types of transactions, information on the transfer pricing methodologies applied and the level of supporting documentation to support these. It may also require details of issues of special interest such as business restructures.
It is important to note that a key difference from CbCR is that it would apply to all taxpayers within the transfer pricing rules not just those larger multinationals above the €750m turnover threshold. From our experience of similar rules in Australia, Belgium and Denmark, the data will add significant compliance costs to business and provide HMRC with valuable information on medium and large businesses that will assist them in identifying transfer pricing risks. It will also provide useful additional information in respect of those who already file a CbCR.
It is clear from the direction of policy travel that it will be important for multinational enterprises (MNEs) to prepare accurate transfer pricing policies and documentation and ensure these are correctly implemented and regularly updated. On the assumption that the proposals will be largely unchanged and become law, then businesses who will be caught should be considering undertaking a risk or gap analysis to ascertain how they will need to amend their compliance policies.
At BDO our 35 strong UK transfer pricing team includes ex-Big 4 and HMRC specialists including a Senior Inspector who recently worked on HMRC’s DPT and PDCF risk assessing and enquiries. We can help and support you in adapting to new initiatives such as the evidence log and IDS. For any queries, please get in touch.