UK and International Tax news
Transfer Pricing Scope and Documentation Condoc
Thursday 1st May 2025
HMRC is seeking views on two related changes to current transfer pricing rules which may affect the exemption for SMEs and additional reporting requirements for MNEs.
The first proposal is to amend the current exemption from transfer pricing for SMEs, by making changes to certain definitions and thresholds.
The second proposal is to introduce a requirement for MNEs to report information on cross-border related party transactions to HMRC through an International Controlled Transactions Schedule (ICTS). The ICTS will focus on objective and readily available information that will help facilitate better identification of transfer pricing risk and allow for more efficient and targeted compliance activity.
These proposed changes will sit alongside the government’s proposal to reform UK law in relation to transfer pricing, permanent establishment , and diverted profits tax.
The general exemption of SMEs from the UK’s transfer pricing rules is set out at s.166 TIOPA 2010. There are specific exceptions which can bring a SME back within scope of transfer pricing, and these are where the taxpayer elects to forego the exemption, where HMRC issues a transfer pricing notice, or where transactions are linked to non-qualifying territories.
The SME exemption was introduced when UK to UK transfer pricing was brought in to comply with EU rules. The exemption was designed to mitigate the impact of UK to UK transfer pricing on smaller businesses. The UK subsequently left the EU.
The government has also proposed to largely repeal the UK to UK requirement as set out in the technical consultation on transfer pricing reform. This would substantially reduce the administrative burden of applying transfer pricing rules to smaller enterprises, as they would generally only apply to cross-border transactions with connected parties.
However, the UK is an international outlier in having exemptions from transfer pricing. Most exempt businesses will therefore already need to apply the transfer pricing rules of another territory to their cross-border transactions with connected parties. The additional burden of applying international standards on transfer pricing in the UK may therefore be limited.
Given this context, the government is proposing to remove the medium-sized enterprise exemption, but retain the exemption for small enterprises, given the greater potential administrative impact applying transfer pricing would have on that population. The government is also proposing several changes to the exemption to ensure that the relevant definitions and legislation remain fit for purpose and are clear and easy to apply.
Small enterprises are those with staff headcount less than 50, and either turnover or balance sheet total (or both) below €10m.
Under The Transfer Pricing Records Regulations 2023, the government introduced a requirement for the largest businesses to maintain specific transfer pricing documentation and provide it on request. Those documents, the master file and local file, need to be prepared in accordance with the OECD Transfer Pricing Guidelines 2022.
The consultation runs for ten weeks from 28 April to 7 July 2025.
The government will analyse the responses to the consultation and publish its response after the consultation closes. The response will address the government’s findings regarding potential benefits and costs arising from the potential new measures. If the government concludes that there is merit in introducing either or both of these changes, then officials will work towards implementation at a future fiscal event.
If you would like more information on the above, please contact Keith Rushen on 0207 486 2378.
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