United Kingdom

The UK government is enacting new TP documentation requirements from FY 2023, necessitating local and master files along with an audit trail. TP rules in the UK are based on the arm’s length principle defined in Article 9 of the OECD Model Tax Convention.

Laws & Regulations

The UK TP legislation is primarily outlined in Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). The rules require taxpayers to use arm’s length transfer prices for their taxable profit assessments. The UK TP rules are self-assessed, and although TP filing is not mandatory, TP documentation can help avoid fines. The UK has incorporated OECD BEPS recommendations into its laws.

Definition of Related Party

Related parties are defined as corporate entities or partnerships controlled by individuals. “Control” includes the power to influence the business’s affairs by holding shares, voting power, or the partnership’s assets or income share. There are additional control tests for joint venture companies and attribution rules for tracing control relationships.

Nature of Transfer Pricing Documentation

The UK encourages the use of both local and master files as best practices. The International Dealings Schedule (IDS) is introduced, which must accompany annual tax returns for cross-border transactions within TP rules’ scope.

Tax Havens & Blacklists

The UK doesn’t maintain a specific tax haven or blacklist. However, some overseas UK territories are considered tax havens by other nations.

Advance Pricing Agreement (APA)

APAs are written agreements between taxpayers and tax authorities to determine the suitable TP method for a specific period. In case of disagreement, the UK legislation allows for arbitration based on the OECD Multilateral Instrument (MLI).

Audit Practice

The UK’s HM Revenue & Customs (HMRC) conducts audits to verify TP rule compliance. HMRC employs risk assessors and economic specialists to decide which MNEs require audits.

Transfer Pricing Documentation

The UK’s TP legislation doesn’t mandate specific documentation. Businesses must maintain records sufficient to support accurate tax returns. An International Dealings Schedule (IDS) reporting requirement is introduced for cross-border transactions within TP rules’ scope.

Level of Documentation

Records must enable accurate tax returns. Documentation for permanent establishments should be maintained in a similar manner as legal entities. Evidence should support an arm’s length result, following the OECD guidelines.

Industry Analysis

Value drivers in the relevant industry provide an initial indication of common profitability levels.

Company Analysis

Documentation should include the management structure, organizational chart, business strategy, and involvement in business restructurings or intangible transfers.

Functional Analysis

The assessment should consider significant activities, responsibilities, assets, and risks borne in intercompany transactions, aligning with OECD guidelines.

Choice of Transfer Pricing Method

The UK follows OECD guidelines, allowing for the acceptance of various TP methods outlined therein.

Economic Analysis – Benchmark Study

Benchmark studies use external databases, primarily regional comparables, and sometimes EMEA comparables.

Inter-company (IC) Legal Agreement

IC legal agreements formalize relationships but hold lower significance, as the “conduct of parties” prevails in the OECD 2017 Guidelines.

Financial Statements

Financial statements must be disclosed for intra-company transactions.

Production Process for TP Relevant Returns, Documents, Forms and Financials Filing requirements, formats, deadlines, and mandatory languages are provided. TP documentation must be in the English language.

Notification Requirement

Tax authorities must notify the taxpayer 30 days in advance if an audit is to be conducted.

Record Keeping

Records must be maintained for six years, including primary accounting records, tax adjustments, and evidence of arm’s length results.

Penalties and Interest Charges

Penalties may be imposed for inaccurate tax returns, depending on the nature and intent of the inaccuracy. Additional corporate tax penalties may also apply. The Diverted Profits Tax (DPT) is applicable if profits have been diverted from the UK.