Transfer pricing documentation in the United Kingdom

  1. A. Transfer pricing documentation requirement
    1. 1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
    2. 2. What is the content of the documentation that must be prepared?
    3. 3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?
    4. 4. In the event that the documentation is not provided within the applicable timescale, or is incomplete, do documentation-related penalties apply in your jurisdiction? If so, please detail the penalties and the circumstances in which they do and do not apply.
    5. 5. Does the absence or incompleteness of documentation reverse the burden of proof as regards the arm’s length character of the transactions?
    6. 6. In the event that the tax authorities (i) impose documentation-related penalties and (ii) make a transfer pricing reassessment, does the imposition of documentation-related penalties prevent the taxpayer from initiating any mutual agreement procedure which may be contained in an applicable tax treaty (or, for EU countries, the procedure contained in the EU Arbitration Convention) with a view to eliminating any double taxation resulting from the transfer pricing reassessment?
    7. 7. Any other relevant aspect not addressed above?
  2. B. Country-by-Country reporting (“CbCR”)
    1. 1. Did your jurisdiction implement the obligation to file a CbCR? If not, is the introduction of the CbCR in your jurisdiction contemplated and, if so, when?
    2. 2. If the obligation to file a CbCR is in force, what is the tax year from which this obligation applies and what is the deadline for filing the CbCR?
    3. 3. Which taxpayers have to file a CbCR in your jurisdiction?
    4. 4. Is the content of the CbCR fully in line with the OECD model (final report on Action 13 of the BEPS project)? If not, what are the differences?
    5. 5. What is the penalty for failing to file the CbCR on time? Can local subsidiaries of a foreign group suffer the local penalty if the foreign group has not filed the CbCR?
    6. 6. Are there tax treaties in force in your jurisdiction allowing the communication of CbCR with other jurisdictions?
    7. 7. Any other relevant aspect not addressed above?
  3. C. As the case may be, other documentation/filing requirement in relation to transfer pricing?
    1. 1. In your jurisdiction, are there any other documentation/filing requirements in relation to transfer pricing?
    2. 2. If so, what is the content of such documentation/filing requirement? What language(s) are to be used by taxpayers?
    3. 3. What is the deadline for meeting this documentation/filing requirement?
    4. 4. Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
    5. 5. What is the penalty for failing to meet this requirement on time?
    6. 6. Any other relevant aspect not addressed above?

A. Transfer pricing documentation requirement

1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

Yes. Under general record-keeping obligations imposed by Corporation Tax Self Assessment, records must be kept as may be needed to enable a taxpayer to deliver correct and complete tax returns within 12 months of the relevant year end, including any adjustments to their commercial profits that arise where the provision between two connected persons differs from an ‘arm’s length’ provision, and profits used to calculate UK tax are reduced, or losses increased, as a result of that provision.

UK transfer pricing legislation provides for certain exemptions for enterprises that are defined under EU rules as small and medium sized. Where the enterprise is part of a group or association, the limits apply to that group. The criteria, tested on the basis of the whole consolidated group, are:

Small Enterprise

  • Maximum number of staff: 50
  • And less than one of the following limits:
    • Annual turnover: EUR 10m
    • Balance sheet total: EUR 10m

Medium Enterprise

  • Maximum number of staff: 250
  • And less than one of the following limits:
    • Annual turnover: EUR 50m
    • Balance sheet total: EUR 43m

If the UK company is within a group that qualifies as small, it is exempt from the need to apply and document arm‘s length prices in respect of transactions with related parties in countries with which the UK has a double tax treaty with an appropriate non-discrimination article.

If the UK company is within a group that qualifies as medium sized, the UK company need not apply arm‘s length transfer pricing unless it is dealing with related parties in territories without a qualifying double tax treaty (as for ‘small’ groups above). However HM Revenue and Customs (“HMRC”) can subsequently require a medium sized group to apply arm‘s length transfer pricing to any of its related party transactions during a given chargeable period.

2. What is the content of the documentation that must be prepared?

a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?

Any provision between ‘connected persons’ must be documented. The definition of ‘provision’ is broad, and represents a transaction or series of transactions including arrangements, understandings and mutual practices whether or not they are, or are intended to be, legally enforceable.

b) What is the definition of “associated enterprises” for the purposes of this requirement (in particular, are transactions between a permanent establishment and its head office in the scope of the documentation requirement)?

‘Connected persons’ are where one party controls the other, or where parties are under common control, with control generally meaning the power to secure by the means of holding of shares or the possession of voting or other powers that the affairs of a company are conducted in accordance with the wishes of the person tested. With effect from 1 April 2004 a 40% participant in a joint venture is also deemed to control that joint venture, a joint venture for these purposes being a company or partnership which is controlled by two persons, each of whom has at least a 40% interest in the venture.

Under the UK rules the ‘separate enterprise principle’ applies when determining the chargeable profits of a UK permanent establishment, and therefore the arm’s length principle and the transfer pricing documentation requirements explained in the OECD transfer pricing guidelines will apply.

c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?

HMRC will accept documentation prepared in accordance with EU TPD guidelines. It is recommended that taxpayers who intend to explicitly follow the EU TPD Code of Conduct in relation to local documentation advise HMRC of this in writing.

d) For all countries (and, in particular, OECD countries), is the content of the documentation similar to that described in the revisions to chapter V of the OECD transfer pricing guidelines (final report on Action 13 of the BEPS project)? If not, are taxpayers entitled to choose between the local requirements and the OECD approach?

The UK transfer pricing rules explicitly state that the entirety of the UK transfer pricing legislation is to be construed in the light of the OECD guidelines. Draft legislation has been introduced to amend the UK transfer pricing legislation so that it refers to the latest version of the OECD’s transfer pricing guidelines, incorporating the revisions made as part of the OECD’s BEPS project. The changes will have effect for accounting periods beginning on or after 1 April 2016 (for corporation tax purposes) and from 2016–17 (for income tax purposes).

e) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?

Yes, to the extent that the foreign taxpayer is a counterparty to a transaction involving a UK legal entity, information relating to the foreign taxpayer may be requested from the UK party to substantiate the pricing of that transaction for UK tax purposes.

f) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?

Sometimes, if UK data is unavailable/limited.

g) If comparable studies are to be provided in general, are safe harbours/specific circumstances exempting taxpayers from preparing benchmark studies (such as the EU Joint Transfer Pricing Forum guidelines on low value adding services 1 Report called “Guidelines on low value adding intra-group services” adopted by the European Union Joint Transfer Pricing Forum during the meeting of 4 February 2010. or revisions to chapter VII of the OECD transfer pricing guidelines about low value adding intra-group services) in your jurisdiction or are there situations in which tax authorities do not request benchmark studies? If so, in which circumstances taxpayers are exempted from benchmark studies?

The UK, by virtue of it having adopted the revised OECD Transfer Pricing Guidelines, accepts the proposals on low value adding services in chapter VII of those guidelines. HMRC also accept the findings of the EU Joint Transfer Pricing Forum guidelines on low value added services.

In addition, it its International Manual HMRC states that it does not want businesses to suffer disproportionate compliance costs, so taxpayers should prepare and keep such documentation as is reasonable given the nature, size and complexity of their business or of the relevant transaction (or series of transactions) but which adequately demonstrates that the taxpayer’s transfer pricing meets the arm’s length standard.

h) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?

English.

3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?

There are no specified deadlines for provision of transfer pricing documentation. Taxpayers should maintain records of transactions and adjustments for a given period prior to the filing date of the relevant tax return; general information powers under Corporation Tax Self Assessment require that the taxpayer provides evidence that pricing of transactions is at arm’s length usually within 30 days from the date of request by the tax authorities.

Penalties may be raised:

  • (a.) If an incorrect return is made and a business has been careless or negligent in establishing the arm’s length basis for the return; or.
  • (b.) If a business does not maintain the appropriate documentation necessary to demonstrate that it has made its returns on the basis that the terms of connected party transactions were considered to be on arm’s length terms.

These penalties fall within general provisions relating to incorrect corporation tax returns, namely that a transfer pricing adjustment may lead to a maximum 100% penalty based on potential tax lost, the rate of the penalty being dependent on the behaviour giving rise to the understatement: penalties are up to 30% for negligence or carelessness, up to 70% for deliberate inaccuracies, and up to 100% for a deliberate inaccuracies aggravated by concealment.

5. Does the absence or incompleteness of documentation reverse the burden of proof as regards the arm’s length character of the transactions?

No. There are no specific UK documentation rules relating to transfer pricing, these fall under Corporation Tax Self Assessment regulations as outlined above.

No.

7. Any other relevant aspect not addressed above?

No.

B. Country-by-Country reporting (“CbCR”)

1. Did your jurisdiction implement the obligation to file a CbCR? If not, is the introduction of the CbCR in your jurisdiction contemplated and, if so, when?

Yes, regulations implementing CbCR were passed on 26 February 2016 and are effective from 18 March 2016.

2. If the obligation to file a CbCR is in force, what is the tax year from which this obligation applies and what is the deadline for filing the CbCR?

The reporting obligation relates to accounting periods beginning on or after 1 January 2016 or accounting periods ending on or after 31 December 2015. Companies will have 12 months from the end of the relevant accounting period in which to file a report with HMRC.

3. Which taxpayers have to file a CbCR in your jurisdiction?

A UK resident parent company of a multinational enterprise (“MNE”) with a consolidated group turnover of GBP 750m or more has to file a CbCR. The measure also includes a requirement for the top UK entity of an MNE to file a CbCR, when it is not the ultimate parent entity of the MNE and the ultimate parent entity is resident in a country that either does not require CbCR or does not exchange reports with HMRC in accordance with an effective multilateral competent authority agreement. There is an exemption if the results the UK entity would be required to file have already been included in a CbCR that HMRC can receive. Voluntary reporting is also possible.

4. Is the content of the CbCR fully in line with the OECD model (final report on Action 13 of the BEPS project)? If not, what are the differences?

Yes.

5. What is the penalty for failing to file the CbCR on time? Can local subsidiaries of a foreign group suffer the local penalty if the foreign group has not filed the CbCR?

A MNE which does not file a CbCR on time is liable to a fine of GBP 300. HMRC may also charge an additional penalty of GBP 60 per day if the CbCR is not filed after the MNE has been notified of the penalty. If no CbCR is filed within 30 days of issue of a penalty, HMRC may apply to the tax tribunal to give an order for an increased daily penalty, which the tax tribunal may in their discretion increase up to a maximum of GBP 1,000 per day.

Any entity under an obligation to file a UK CbCR can suffer a penalty for late filing. In addition to the penalties for late filing, a penalty of up to GBP 3,000 may be charged if inaccurate information is carelessly or deliberately provided to HMRC.

6. Are there tax treaties in force in your jurisdiction allowing the communication of CbCR with other jurisdictions?

On 27 January 2016, the UK along with 30 other countries signed the Multilateral Competent Authority Agreement for the automatic exchange of country-by-country (“CbC”) reports (“CbC MCAA”). This sets outs the rules and procedures for tax authorities, including HMRC, to exchange automatically CbC reports, prepared by the reporting entity of a multinational enterprise and filed with the tax authority of that entity’s jurisdiction of tax residence, with the tax authorities of all jurisdictions in which the MNE operates. The first exchanges will start in 2017–18 for 2016 information. Countries not covered by the CbC MCAA may participate either through double tax conventions or tax information exchange agreements. The UK has a large number of tax treaties with suitable information exchange provisions, as well as information exchange agreements enable the communication of CbCR with other countries.

7. Any other relevant aspect not addressed above?

There are anti-avoidance measures in place in the UK which target arrangements that are entered into for the purpose of avoiding an obligation under the CbCR regulations, the effect of which is that those arrangements are to be disregarded.

C. As the case may be, other documentation/filing requirement in relation to transfer pricing?

1. In your jurisdiction, are there any other documentation/filing requirements in relation to transfer pricing?

No.

2. If so, what is the content of such documentation/filing requirement? What language(s) are to be used by taxpayers?

Not applicable.

3. What is the deadline for meeting this documentation/filing requirement?

Not applicable.

4. Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

Not applicable.

5. What is the penalty for failing to meet this requirement on time?

Not applicable.

6. Any other relevant aspect not addressed above?

Not applicable.