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Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
Regarding transfer pricing documentation generally, the government has announced its intention to adopt part of the Organisation for Economic Cooperation and Development’s (OECD’s) recommendations through the passage of the Taxes (Base Erosion and profit Shifting) (Country-by-Country Reporting) Regulations 2016. Pursuant to these regulations, the completion of a country-by-country report is mandatory.
Her Majesty’s Revenue and Customs (HMRC) has also released guidance supplementing the regulations, namely HMRC International Exchange of Information Manual IEIM300000.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
Transfer pricing documentation Although there are no specific transfer pricing documentation requirements in the United Kingdom, taxpayers are advised to maintain sufficient records that enable them to complete an accurate tax return, such as evidence demonstrating that transactions are at arm’s length. HMRC may request transfer pricing documentation from taxpayers, including information in relation to the functions, assets and risks in the United Kingdom compared with those belonging to other parts of the multinational enterprises. HMRC can commence information gathering procedures if the documentation is insufficient or is not submitted in response to a request.
Country-by-country report Multinational enterprises are required to file a country-by-country report with HMRC if it:
- has at least one entity based in the United Kingdom and at least one in another country; and
- a consolidated group revenue of at least €750 million.
Those enterprises required to file the country-by-country report to HMRC must provide:
- the amount of revenue and profit generated and tax paid; and
- the total number of employees, capital, retained earnings and tangible assets for each tax jurisdiction they operate in. For a group that is not resident in the United Kingdom and where its parent is resident in a jurisdiction that either does not require country-by-country reporting or does not exchange reports with HMRC, the top UK entity within the group will be required to file a report in respect of the entities beneath it.
The regulations have been amended, to extend these reporting requirements to partnerships with effect from April 20 2017.
A country-by-country report must be presented in the form directed by HMRC (which, in accordance with HMRC published guidance, requires the use of the OECD extensible mark-up language schema), completed following HMRC’s rules and submitted online via the HMRC portal.
Master file and local file There is not yet legislation for master file or local file requirements. However, where a master file has been prepared by a multinational enterprise for another jurisdiction, HMRC will likely expect the taxpayer to submit this on request.
What are the penalties for non-compliance with documentation and reporting requirements?
If a taxpayer causes a loss of UK tax through inaccuracies in its tax return, whether through carelessness or deliberate conduct, HMRC may impose penalties. As mentioned above, taxpayers should maintain contemporaneous transfer pricing documentation to demonstrate that any intragroup transactions were at arm’s length and that reasonable care was taken when making any transfer pricing adjustments to a tax return.
The penalty for not filing a country-by-country report is £300, plus £60 for each additional day that it is late following notification by HMRC (capped at £1,000). A £3,000 fine will be levied where taxpayers knowingly file a country-by-country report containing inaccurate information.
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
Even though there is no official requirement to file a master file and local file, it is common practice to have these documents as audit risks are high when they are absent.
Documentation at all three levels – country-by-country report, master file and local file – should be aligned and the overall outcome must be consistent with the functional analysis pertaining to all entities in the group.
As noted above, UK taxpayers are required to keep sufficient records and documents in order to demonstrate that their transactions with associated parties have taken place on an arm's-length basis or, where this is not the case, appropriate adjustments have been made.
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