UK aligns its Transfer Pricing Documentation requirements with OECD Guidelines

Universally, Transfer Pricing (TP) has been dealt with in different jurisdictions with different degrees of applications. In essence, TP is a means of pricing transactions between connected parties based on the internationally recognized arm’s length principle, which seeks to determine what the price would have been if the transactions had been carried out under comparable conditions by independent parties. In recent years there have been significant developments in the field of international tax.

It has been more than six years since the Organisation for Economic Cooperation and Development (OECD) presented a package of measures in response to the G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan, including a requirement to develop rules regarding TP documentation. The Action Plan 13 OECD placed prominence on the globally standardized approach for maintaining a three-tiered approach to TP documentation. Having the right information at the right time helps in identifying and resolving TP risks, due to which the OECD introduced a standardized approach of documentation consisting of:

  • a Master File, containing standardized information relevant for all multinational enterprise group members.
  • a Local File, referring specifically to material transactions of the local taxpayer.
  • a Country-by-Country Report (CbCR) for the largest multinational enterprise groups containing aggregate data on the global allocation of income, profit, taxes paid, and economic activity among the tax jurisdictions in which it operates.

The UK had implemented the Country-by-Country minimum standard but did not introduce specific requirements regarding Master File and Local File because it already had broad record-keeping requirements. Experience has shown that the absence of specific TP documentation requirements and supporting guidance has created a degree of uncertainty for UK businesses regarding the appropriate TP documentation they need to keep, leading to an inconsistent approach. Keeping in cognizance of Action Plan 13 and aligning its TP documentation requirements with the OECD TP Guidelines, the UK Government introduced draft legislation as a part of the draft Finance Bill 2022/23 on 20 July 2022 to prescribe and standardize the format of the TP documentation.

Applicability The provisions of the draft legislation would apply to large multinational businesses having tax presence in the UK, i.e., a business having global revenues of 750 million euros or more.
Effective Date Applicable for accounting periods beginning on or after 1 April 2023.
Proposed provisions In order to comply with the existing TP provisions in the UK, the business has to retain sufficient records to demonstrate the completeness and accuracy of their tax returns. However, the newly introduced documentation requirements would give a degree of certainty and consistency of approach to the businesses in the UK.
New powers are being built into Finance Act 1998 and Taxes Management Act 1970 to enable regulations to specify certain TP records which must be kept and preserved. The regulations will specify that the Master File, Local File and Summary Audit Trail (SAT) questionnaire documents must be kept and preserved.


  • Introduction of ‘Summary Audit Trail’ wherein a complete questionnaire highlighting the actions undertaken while preparing the TP Local File document.
  • Regulations specifying that the Master File, Local File and SAT documents must be kept and preserved in support of the TP arrangement of the UK entity.
  • Information notices are revised in order to specify TP information or documents referenced in the new regulations. The changes also ensure that relevant TP documents can be requested outside an inquiry. It removes the requirement for the documents to be in the ‘possession of power’ of the UK entity in question when they are in the ‘possession or power’ of another person within the multinational group. This would enable the HMRC (UK Tax Authority) to access documents relevant to the TP arrangement of a UK taxpayer, which is available outside the UK jurisdiction but within the multinational group.
  • Penalties would be imposed under the presumption that inaccuracy is careless if there is a failure to maintain relevant records or to produce those records on request. The taxpayer would be able to negate the said presumption only if it is able to prove that the documents and underlying TP documentation had been prepared in advance of their Corporate Tax Return filing or otherwise took reasonable care for the same.

Our Comments

As a result of having to report TP information within the documentation clearly, UK businesses will have a coherent and more robust TP position before filing the Corporation Tax return, and this may encourage and incentivize businesses that adopt higher-risk TP positions to change their behavior.

This is a welcoming step undertaken by the UK Government, which would help the business in the UK to clearly report TP information in the form of prescribed and standardized documentation. Businesses will maintain robust documentation of the pricing positions undertaken while filing the Corporate Tax Return. HMRC would also have access to high-quality data in a standardized format. More informed risk assessments, utilizing target resources efficiently, and reduced time for establishing facts in compliance interventions would be an added advantage to the proposed draft legislation.