On 23 March 2021  HMRC issued a consultation which proposes new transfer pricing documentation rules.

As things stand, HMRC does not prescribe the form or content of transfer pricing (TP) documentation for UK taxpayers. However, it is now consulting on a requirement for large groups with UK operations to be ready to produce a specific UK-focused TP file within 30 days of a request.

HMRC has also proposed changes to the documents it receives from taxpayers. These include an ?evidence log? which would provide specific data and facts to help better inform a TP risk assessment, and an International Dealings Schedule (IDS) which would accompany annual tax returns.

Three key areas

While many other countries quickly mandated all of the Organisation for Economic Co-operation and Development (OECD)'s base erosion and profit shifting (BEPS) Action 13 requirements (master file, local file and country-by-country-report (CbCR)), only the CbCR is currently in force in the UK. The consultation seeks to address apparent concerns from HMRC around documentation quality.

The consultation puts forward a list of 18 questions covering three key topics:

1. Introducing a requirement to have a master file and a UK local file (where a group which is within CbCR thresholds has UK operations) - A mandatory filing obligation is not proposed, but UK taxpayers would be expected to be able to supply the documentation within 30 days of a request by HMRC.
2. Raising the bar on documentation quality by requiring an ?evidence log? as part of the UK local file - This would be similar to what is already required within HMRC's Profit Diversion Compliance Facility (PDCF) guidance, where HMRC requests specific evidence or data to support key facts and assertions. The expanded use of the ?evidence log? for standard transfer pricing documentation reflects a view that HMRC is not always getting the information it requires in order to risk assess the transfer pricing position, and emphasises the importance of preparing effective and contemporaneous documentation that is backed up with an adequate audit trail.
3. Introducing an International Dealings Schedule (IDS) - HMRC is proposing a new reporting requirement covering cross-border related party transactions. The IDS is likely to underpin a more automated risk-assessment approach for HMRC. If introduced, this would place a greater focus on effective data management for transfer pricing purposes. Some countries, including Australia, already have a version of the IDS in place.

Specific considerations for financial services groups

As mentioned, the consultation does not seek to differentiate between sectors. However, financial services clients may consider the following:

• Financial services groups will have a potentially significant new filing requirement with an increased burden on resources. The breadth of product lines and number of cross border transactions in some financial services groups could make this particularly onerous. Taxpayers will want to consider how to mitigate the extra compliance burden of the new requirements, perhaps with technology solutions or more efficient documentation processes.  
• The ability to evidence that the documentation prepared sufficiently substantiates key facts and is backed up with an adequate audit trail in the ?evidence log?. This may require a different approach to functional analysis, potentially including more (and more targeted) interviews. Interviewees may have to accept that their statements may be presented to tax authorities and they may be named contributors within the TP documentation.
• Whether or not they have the technical capabilities to extract information to populate the IDS from existing records and data sources in order to present this to HMRC promptly and in a consistent and reliable manner. There are likely to be issues with how to account for derivatives, split hedges and other complex financial transactions, as well as questions around the appropriate level of aggregation of transactions for IDS reporting.

Next steps

The consultation is a clear signal from HMRC that TP will continue to be a focus of its resources. It does not quote a specific expected yield from the proposed changes, but it references the £6 billion of tax revenue generated from transfer pricing compliance activities in the past five years.

This increased focus will inevitably come at the cost of a higher compliance burden for UK-based taxpayers. The responses to the consultation will help to potentially limit this.

For the financial services community it will be important that the specificities of cross-border transactions in financial services groups are properly understood by HMRC and reflected in the guidance. The deadline for responding to the consultation is 1 June 2021.