New Transfer Pricing Regulation in the UK

July 13, 2023

On April 1, 2023, the new Transfer Pricing regulations came into force in the United Kingdom after its approval by the British Government in July. The new regulation has established rules regarding Master File and Local Reports, as well as penalties for lack of documentation. 

1. Background

Years ago, the UK Government passed the “Taxation (International and Other Provisions) Act 2010, Part 4”. The country followed for the first time the OECD Guidelines, based on the Arm’s Length Principle.   

Subsequently, the Country by Country Report was introduced for fiscal years beginning on or after January 1, 2016, for taxpayers with income exceeding € 750 million.  

On the other hand, this Act established that the Transfer Pricing documentation must be preserved for up to six years following the end of the accounting period, being the following documents required: 

  • Primary accounting records  
  • Tax adjustment records  
  • Related party transaction records  
  • Documentation evidencing an Arm’s Length result. 

Regarding the Transfer Pricing methodology, the Tax Administration accepts the methods proposed by the OECD, as long as be consistent with the functional and risk profile of the entity. It also allows the use of other methods when justified and appropriate.   

2. Self-assessment Regime

In the UK, the Arm’s Length compliance is based on a self-assessment regime, i.e., the taxpayer must confirm that the Transfer Pricing applied by the company complies with the legislation, and, if not, they must adjust their statements in good faith.   

3. New Transfer Pricing Standards

The new obligations establish the necessity to have a Local Report and a Master File. This documentation must contain all the information set forth in Annexes I and II of the OECD Transfer Pricing Guidelines, published in 2022.  

The requirements will be implemented through regulations detailing the obligation to preserve and provide the UK Tax Administration with such documents within 30 days of the request. 

On the other hand, the UK Treasury is empowered to implement the Summary Audit Trail (SAT) requirement, which consists of the drafting of a document detailing the significant actions taken to prepare the Local Report. 

4. New Penalties

There are two types of penalties that may be applied. Firstly, a fixed penalty for failure to preserve or file the documentation, which amounts to £3,000. In this case, when large companies fail to do the necessary work to preserve the relevant records or fail to file such records when requested will give rise to a presumption of punishable recklessness unless proven otherwise through documents and proofs demonstrating that the underlying Transfer Pricing information was prepared prior to filing their Corporate Income Tax return.  

Secondly, for reckless or wilful error, in the case of the former, the maximum penalty will be 30% of the potential loss or erosion of income. In the case of the latter, it will depend on whether it is hidden or not. If not, the penalty will be 70% of the potential loss or erosion of income. If it is hidden, it will be 100% of the potential loss or erosion of income.   

Source: Legal Today  12/07/23