Introduction

On 24 November 2023, Her Majesty’s Revenue and Customs (HMRC) released guidance on the transfer pricing (TP) documentation requirements for permanent establishments (PEs) in the UK. The guidance outlines the specific documentation that PEs must maintain and provide to HMRC upon request.

Background

TP is a critical area of international tax law that ensures that MNEs price their cross-border transactions at arm’s length, as if they were conducted between independent parties. This principle is fundamental to ensuring that profits are allocated appropriately among different tax jurisdictions.

The UK has a long-standing commitment to enforcing the arm’s length principle. In recent years, HMRC has increased its focus on TP compliance, particularly in relation to MNEs with a significant presence in the UK.

The Guidance

The new guidance is a significant development in the UK’s TP regime. It reflects HMRC’s continued focus on ensuring that MNEs are complying with the arm’s length principle.

The guidance applies to all PEs in the UK, regardless of their size or industry. It is effective for accounting periods beginning on or after 1 April 2023.

Key Requirements

The key requirements of the guidance are as follows:

  • Contemporaneous Documentation: PEs must maintain contemporaneous documentation that supports their TP arrangements. This means that the documentation must be created or gathered at the time the TP arrangements are made.
  • Arm’s Length Principle: The documentation must be sufficient to demonstrate that the PE’s TP arrangements are in accordance with the arm’s length principle. This means that the PE must be able to show that its TP arrangements would have been agreed to by independent parties in comparable circumstances.
  • HMRC Request: The documentation must be provided to HMRC upon request within a reasonable timeframe. HMRC will typically request documentation as part of a TP audit.

Read Original from : https://www.legislation.gov.uk/uksi/2023/818/contents/made

Draft Template

HMRC has also released a draft template for TP documentation for PEs. The template is not mandatory, but it is designed to help PEs comply with the guidance.

Penalties

Failure to comply with the guidance could result in significant penalties for MNEs. HMRC can impose penalties of up to 300% of the tax underpaid as a result of non-compliant TP arrangements.

Conclusion

The release of the guidance is a significant development in the UK’s TP regime. It reflects HMRC’s increased focus on ensuring that MNEs are complying with the arm’s length principle.

MNEs with PEs in the UK should familiarize themselves with the guidance and ensure that they are compliant with the requirements. Failure to do so could result in significant penalties.

Additional Considerations

In addition to the key requirements outlined above, MNEs should also consider the following:

  • Local File: PEs should maintain a local file that contains all of the relevant TP documentation for the PE. The local file should be readily accessible to HMRC upon request.
  • Master File: MNEs with a group turnover of €750 million or more are also required to maintain a master file. The master file contains TP documentation for all of the MNE’s PEs around the world.
  • Country-by-Country (CbC) Reporting: MNEs with a group turnover of €750 million or more are also required to prepare CbC reports. CbC reports provide high-level TP information for MNEs on a country-by-country basis.

Seeking Professional Advice

Given the complexity of TP documentation requirements, MNEs with PEs in the UK should seek professional advice to ensure that they are compliant with the guidance.

Conclusion

The new guidance on TP records requirement for permanent establishment is a significant development in the UK’s TP regime. MNEs with PEs in the UK should familiarize themselves with the guidance and ensure that they are compliant with the requirements. Failure to do so could result in significant penalties.

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