Transfer pricing: master & local file in, IDS out...for now

Yesterday, HMRC released a summary of the main findings of its consultation on "transfer pricing documentation" launched on 23 March 2021. The objective of the consultation was to explore transfer pricing record keeping requirements for large multinationals (MNEs) operating in the UK and the introduction of a new tax filing requirement for all businesses affected by transfer pricing regulations in place of HMRC’s current record keeping requirements.

The consultation was focused on two key areas:

• the introduction of master and local file documentation standards as per chapter V of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines); and
• the introduction of the international dealings schedule (IDS) to report cross-border transfer pricing transactions.

Whilst many MNEs in the UK have already implemented the OECD Guidelines’ three-tiered documentation approach (i.e. master file, local file and country-by-country report) owing to reporting requirements in other jurisdictions, the notable shift in HMRC’s enthusiasm to adopt a more formalised standard to transfer pricing documentation does raise an eyebrow, or two.

HMRC’s tone remains supportive of the key concerns raised by respondents to the consultation and, in summary, decided that it will legislate to require the largest businesses to maintain a master file and local file, and a supporting summary audit trail, to take effect from April 2023. 

On the introduction of the IDS, the government will not introduce any legislative filing requirements but will keep this policy area under review in future. Should an IDS requirement be introduced, HMRC appears committed to striking “the right balance” in obtaining information to support risk assessments and more focused compliance interventions, without creating disproportionate compliance burdens for businesses.

In reality, nothing has really changed for larger MNEs in the UK who already adopt the OECD Guidelines three-tiered documentation approach. For those who have historically relied upon HMRC's record keeping requirements, perhaps now is the time to consider and prepare for a more formalised stance on transfer pricing documentation given that legislation will most likely be drafted with reference to the three-tiered documentation approach.