UK transfer pricing documentation

23 May 2019

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In 2015, the Organisation for Economic Co-operation & Development (OECD) published its final recommendations on the 15 actions identified to counter Base Erosion and Profit Shifting (BEPS). The recommendations in Actions 8-10 and Action 13 rewrote substantial sections of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which was published in July 2017 and includes detailed appendices on transfer pricing documentation.

UK’s transfer pricing legislation

UK transfer pricing rules are based on the internationally agreed ‘arm’s length’ principle. Guidance on applying the arm’s length principle is set out in the OECD guidelines, which are referred to in the UK transfer pricing legislation.

The arm’s length principle is the international consensus on transfer pricing of transactions undertaken by associated enterprises (controlled transactions), ie the price at which they must take place for tax purposes.

The arm’s length principle reflects the conditions under which independent enterprises transact with each other in respect of their commercial and financial relationships, and which are ordinarily determined by market forces.

The UK’s transfer pricing legislation applies to transactions between associated UK enterprises as well as non-UK enterprises. An enterprise can be a company, a partnership or any other entity which is undertaking commercial transactions.


There is an exemption from the UK’s transfer pricing rules for the majority of transactions carried out by small and medium-sized enterprises (SMEs), although HM Revenue & Customs (HMRC) can disapply the exemption for medium-sized enterprises in certain circumstances. If an SME is party to a transaction relevant to a patent box claim, HMRC may issue a notice requiring the transaction to be computed under the transfer pricing rules.

The exemption does not apply to transactions with a related enterprise in a territory with which the UK does not have a double tax treaty with an appropriate non-discrimination article – this covers many low tax jurisdictions. Such transactions are always subject to the UK’s transfer pricing rules

Aligning transfer pricing outcomes with value creation

The OECD’s BEPS initiative identified that the pre-2017 OECD guidelines could be misapplied, such that they resulted in outcomes in which the allocation of profits was not aligned with the economic activity that produced the profits, therefore providing some multinational enterprises (MNEs) with tax advantages.

The revised OECD guidelines are aimed at counteracting this by providing revised guidance on the application of the arm’s length principle and on the application of the transfer pricing rules to intangibles.

The revised guidance for applying the arm’s length principle aims to create transfer pricing rules which are aligned with value creation by ensuring that:

  • Actual controlled transactions are identified and transfer pricing is not based on contractual arrangements that do not reflect the economic reality of the arrangements;
  • Contractual allocations of risk are respected only when they are supported by actual decision-making;
  • Capital and assets held separately from the relevant functions will generate no more than a risk-free return, meaning that no premium returns will be allocated without the relevant substance; and
  • Transactions will be disregarded by tax administrations where they do not possess the commercial rationality of arrangements that would be agreed between unrelated parties under comparable economic circumstances.

These aspects of the revised guidance ensure that a transfer pricing analysis is based on each associated enterprise’s actual contribution in a transaction and not on contractual terms, or the contractual allocation of risk, which may not be actually followed in practice.

The revised guidance on intangibles ensures that legal ownership of the intangible alone does not determine entitlement to economic returns from the exploitation of the intangible; and that enterprises performing the functions relating to the development, maintenance, protection and enhancement, etc, of the intangibles receives appropriate remuneration.

Low value-adding intra-group services

The 2017, OECD guidelines also introduced an approach to the pricing of low value-adding intra-group services, specifying categories of services which command a limited mark up on costs, without the need for detailed benchmarking.

Transfer pricing documentation

Action 13 of the BEPS Action Plan introduced a three-tiered standardised approach to transfer pricing documentation that is now set out in the OECD guidelines, as follows:

  • Master file: providing an overview of the MNE group business, including the nature of its global business operations, overall transfer pricing policies and global allocation of income and economic activity. A review of this file by tax administrations should assist in evaluating the presence of significant transfer pricing risk. This file would normally be prepared by the group’s headquarters company.
  • Local file: providing more detailed information relating to controlled transactions supplementing the information in the master file. The file’s objective is to document that the taxpayer has complied with the arm’s length principle in its material transfer pricing positions affecting a specific jurisdiction. It focuses on specific information relevant to the transfer pricing analysis related to the transactions taking place between the local country affiliate and associated enterprises. It also includes relevant financial information, a comparability analysis and the selection and application of the most appropriate transfer pricing method.
  • Country-by-Country (CbC) report: requiring information for each tax jurisdiction relating to the global allocation of income, taxes paid and certain indicators of the location of economic activity across the tax jurisdictions in which the group operates. This is only required for groups with a worldwide turnover exceeding €750 million and is filed annually, generally by the group’s ultimate parent entity (UPE). Where a UK enterprise is part of a group filing a CbC report and is not the UPE (or surrogate parent entity), a notification should be made to HMRC before the relevant year end, informing it where the group CbC report will be filed, by whom and which UK tax resident entities it covers.

HMRC’s procedural manuals state that: “The Action 13 report details a standardised approach for transfer pricing documentation, these being the master file and local file, as well as the Country-by-Country report. The master file contains a high-level overview of the group’s global business operations and transfer pricing policies; the local file provides detailed transactional transfer pricing documentation for a specific jurisdiction identifying material related party transactions, the amounts involved and the company’s transfer pricing analysis of those transactions. Annexes I and II of the Action 13 report set out the documentation expected in master and local files.

“The Action 13 report highlights that some transactions are not sufficiently material to require full transfer pricing documentation, thereby recognising that the analysis retained should be both proportionate and appropriate to the size and complexity of the business and transactions involved. Whilst HMRC does not require a master file or local file to be prepared or filed with the CbC report, it remains a requirement that the transfer pricing documentation retained must adequately demonstrate that customer transfer pricing meets the arm’s length standard.

“Please note that although HMRC does not require the master file or local file to be prepared or filed, other tax authorities may have this requirement for multinational groups operating in their jurisdiction.”

HMRC’s manuals also list documentation and records to be retained for transfer pricing purposes at INTM483030.

Although HMRC’s manuals state that HMRC does not require the preparation of a master and local file, it is our recommendation that the documentation prepared for UK purposes is on the basis of the requirements of Annexes I and II (master file and local file) of the 2017 OECD guidelines, taking into account the size and complexity of the transactions. This is because the guidelines provide a simple and consistent framework for supporting the arm’s length standard, and ensures that UK documentation will be in line with the rest of the worldwide group.

Practical implications for MNEs

  • MNEs should consider the substance supporting their current transfer pricing policies, including the location of significant people functions, assets and risks, and assess whether this is in line with contractual arrangements.
  • We are expecting greater focus from HMRC on transfer pricing and recommend all UK enterprises review their current transfer pricing policies and documentation, undertaking a gap analysis to identify where they do not comply with the new documentation guidelines.
  • Current documentation should be revisited and updated regularly in accordance with the rules.
  • Groups need to decide whether to produce a master file for the group as a whole or whether to structure the documentation per business unit.
  • UK companies submitting patent box claims should consider the arm’s length nature of the relevant transactions and support for these.
  • Non-resident companies with income from UK property will be subject to the UK corporate tax rules from 6 April 2020 and may wish to address how (or if) the transfer pricing rules will affect them.
  • UK enterprises should decide which person in the organisation will be responsible for ensuring the compliance with the new rules, liaising with their overseas counterparts as necessary, to ensure a coordinated group approach to the provision of documentation. For larger groups this may be the senior accounting officer.
  • The management of UK enterprises that are part of overseas headquartered groups should ensure that documentation prepared centrally overseas, including the UK local file, is reviewed by UK management and tax advisers to ensure that the signatory of the UK enterprise’s tax return is in agreement with the documented policy in the local file and it accords with the tax return they are signing. This review should be undertaken well in advance of the tax return being approved.
  • Management of medium-sized enterprises not currently within the UK transfer rules should assess whether group transactions are at arm’s length and implement a ‘lighter’ version of the documentation described above. Due to the expected increase in focus from HMRC on transfer pricing, we are expecting more transfer pricing notices to be delivered to medium-sized enterprises.

For advice regarding any of the issues raised here, please speak to your usual Saffery partner, or contact Dawn Ross or Robert Langston.

This factsheet is based on law and HMRC practice at 1 May 2019.

Contact Us

Dawn Ross
Director, Peterborough

Key experience

Dawn is an experienced corporate tax director and leads the transfer pricing practice at Saffery. She also specialises in advising...