An HMRC 23 March consultation on strengthening the transfer pricing (TP) documentation requirements for auditors and business valuers indicates a continued focus by the UK tax authority on revenue-raising from TP audits. The UK are not alone in their desire to minimise off-shoring assets—and, with proposed corporate rate changes likely in the US by midsummer, a period of rate adjustments and asset movement can be anticipated. Analyses required for transborder taxation are not likely to become more simple.
As the Consultation describes, HMRC wish to:
- Conduct better risk assessment;
- Direct TP enquiries more appropriately; and
- Reduce the time taken to establish the facts when enquiries are opened.
Whether these steps reduce transfer pricing analysis time, or the length and complexity of disputes, remains to be seen. Several analyses, including a thoughtful one by Freshfields Bruckhaus Deringer’s Sarah Bond (for Lexology) point out that “HMRC’s radar for difficult TP cases is already quite finely tuned and thorough testing of the facts will almost always be required for the enquiry to be worked properly and lead to successful resolution.”
The UK have not completely adopted international transfer pricing recommendations from the OECD (their recommendations include three tiers of standardised documentation, but the UK has only implemented one: country-by-country reporting, or CBCR). This documentation only extends to large multinationals, so the remainder of the economy—and their business valuers—are more or less on their own to assess whether tax filings are accurate—and correctly documented. Transfer pricing experts turn to HMRC’s INTM483030—Transfer Pricing: Operational Guidance: Working a Transfer Pricing Case: Transfer Pricing Documentation, though there’s little help on the scope and format of required work.
HMRC now wish to improve their compliance assessments via the other two OECD routes: master file and local file requirements. Many other jurisdictions—Australia is often considered a leader here—have improved their tax enforcement and review processes this way. Bond comments that “cross border, intra-group transactions … subject to a materiality threshold (to be determined) … could include information such as the nature of transactions, details of the counterparty, the compensation and the transfer pricing methodologies applied.”