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April 6, 2021

UK issues new consultation on transfer pricing documentation

Executive summary

On 23 March 2021, the United Kingdom (UK) Government published a command paper entitled ”Tax policies and consultations: Spring 2021,” alongside a collection of consultation documents, which calls for evidence and consultation response documents. A number of the documents and announcements are intended to shape the next steps in delivering the Government's 10-year tax administration strategy, as announced in July 2020. However, there are other measures which relate to policy across a range of important tax issues.

Among the consultations issued was a new consultation on transfer pricing documentation. The consultation seeks views on potential changes to transfer pricing record keeping requirements for the largest businesses and the introduction of a new tax filing requirement for all businesses affected by transfer pricing regulations. The consultation is open until 1 June 2021. 

Currently, HM Revenue & Custom’s (HMRC) transfer pricing documentation requirements are governed by relatively generic record keeping requirements for businesses to keep sufficient records to deliver correct and complete returns. This consultation explores potential changes to:

  • Transfer pricing record keeping requirements for the largest businesses

  • Introduction of a new tax filing requirement for all businesses affected by transfer pricing regulations

The consultation document considers the case for updating and strengthening current transfer pricing documentation requirements with the objective of providing greater certainty for UK businesses, supplying HMRC with better quality data to enable more efficient and targeted compliance interventions and aligning the UK’s practice more closely with the transfer pricing documentation requirements of comparable tax administrations and the Organisation for Economic Co-operation and Development’s (OECD) Action 13 Final Report. 

Detailed discussion

General documentation

The Government is considering the introduction of a requirement for affected UK businesses to keep, and produce promptly upon request, specific documentation to articulate and support the transfer pricing positions taken in their tax returns as described in the OECD standardized approach.

While UK businesses are already required to keep and retain sufficient records to demonstrate that their tax returns are complete and accurate, including in respect of any figures affected by the transfer pricing rules, HMRC does not generally prescribe specific records that UK businesses must prepare or the format of those records. The proposed changes mean that HMRC would require UK businesses to keep certain information relating to transfer pricing matters in standardized formats. UK businesses will be required to extract information from their existing records and to present this to HMRC promptly in a consistent manner. 

Master and local files

The Government is seeking views on the introduction of a mandatory requirement for multinationals within country-by-country (CbC) reporting groups to provide HMRC with a copy of the master file upon request and to keep (and produce on request) a local file. The suggestion is that groups will have 30 days to provide these documents to HMRC.

A failure to produce the master file and local file within the required time would be taken into account by HMRC when considering whether reasonable care had been taken in the preparation of the tax return. HMRC does recognize that for groups within the CbC reporting regime it may be appropriate to consider minimum values to focus requirements on sufficiently material transactions, in line with the OECD’s standardized approach.

Importantly, the consultation also contemplates the requirement for businesses to maintain an Evidence Log, similar to that prescribed in the Profit Diversion Compliance Facility Process. This is a great deal more comprehensive than the Action 13 standard and if introduced is likely to represent a significant additional compliance burden.

The consultation asks:

  • Whether respondents agree that most multinational groups within the CbC reporting regime will already routinely be preparing master files to comply with the OECD’s standardized approach and to comply with transfer pricing documentation requirements in other countries?

  • In the event that a multinational subsidiary company reports that the group does not maintain a master file or that the master file is not within its power or possession, what steps could be taken to ensure equality of treatment?

  • Whether respondents agree that any new master file requirement should apply only to multinational enterprises (MNEs) within CbC reporting groups?

In respect of a local file, the Government is looking for observations on the extent to which local file requirements align with transfer pricing documentation which multinationals already routinely maintain. It would also welcome comments on the possibility of issuing further practical guidance about local file documentation, including the possibility of a requirement to maintain an Evidence Log setting out key facts as an appendix to the local file.

International Dealings Schedule (IDS)

The consultation notes that a number of tax authorities require businesses to file an annual schedule reporting data about cross-border transactions through some form of IDS, in addition to any requirement for a master file and local file.

Potential ideas for the types of data and information that could be reported via an IDS might include

  • The nature and amount of specific types of transactions

  • Details of financial dealings

  • Compensation, receipts or payments of a non-financial nature

  • Information on restructuring activity

  • Information on the transfer pricing methodologies applied

  • Information on the level and type of supporting documentation for the transfer pricing methodology selected and applied

  • Counterparty details for transactions including identity and country location

  • Information on activities

  • Corporate group information (to enable entity level data to be combined and attributed to a particular MNE group)

In terms of scope, the Government is exploring the idea that all UK businesses in scope of UK transfer pricing legislation would be required to file an IDS providing details about cross-border, intragroup transactions where the counterparty is in another territory.

Small and medium sized businesses are generally exempt from the requirement to apply transfer pricing and therefore would not be in scope of the IDS. UK to UK transactions would also be excluded.

If the UK Government takes forward proposals to update transfer pricing documentation requirements, it will explore materiality limits to exclude some transactions from these reporting requirements. Transactions could be excluded according to materiality by size or nature. For example, some very small transactions may not need to be reported, or transactions of a very low risk nature could be excluded. Furthermore, where a business has many small transactions of a very similar nature then these could be aggregated and reported as a single figure in the IDS.

Next steps

The consultation is being carried out against the background of the UK’s Tax Consultation Framework. This consultation is taking place during stage 1 of that process which means that the purpose of the consultation is to seek views on the policy design and any suitable possible alternatives. If, after this consultation, it is decided to take the proposals forward, there will be a later consultation on any specific proposal for reform. EY UK plans to respond to the consultation and an EY transfer pricing contact would be available to discuss any views or concerns you may have on the proposals. There may also be the opportunity to discuss the proposals with HMRC during the course of the consultation and future Alerts will report on developments over the next few months.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), London

Ernst & Young LLP (United States), UK Tax Desk, New York

Ernst & Young LLP (United States), FSO Tax Desk, New York

Ernst & Young LLP (United States), Transaction Tax Desk, New York


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