Getting it right for your business

• If your group has an annual turnover of at least €750m and UK operations, from 1 April 2023, a Master File and UK Local File must be prepared.
• The documentation should be in place before the corporation tax return is filed and should be available to HMRC within 30 days of a request.
• HMRC is also expected to introduce the requirement to produce a Summary Audit Trail (SAT). The SAT will document the steps taken by the group in arriving at the conclusions in their TP documentation. The effective date and format of the SAT should be confirmed later this year.

• Whilst the new mandatory requirement targets groups with annual consolidated turnover in excess of €750m, HMRC has stated it highly recommends that large UK companies below this threshold, which are part of an international group, should also prepare documentation in this format.
• HMRC, like many overseas tax authorities, perceives TP as a major area of tax risk and has increased its scrutiny of international arrangements for businesses of all sizes. This is linked with the wider objective to ensure international groups have compliant TP policies and documentation in place.

TP is often seen as a backward-looking compliance function - focused on managing the risk of a tax authority challenge. And while it is always essential to manage TP risk, especially given the increased number of disputes we are seeing across our client base, we see TP differently, as it can contribute to optimising your tax position and achieving scale.

Increasingly we are helping our clients use TP as a lever to expand internationally:

• Tax efficiency – Many businesses are experiencing growth in international markets. This may give rise to mismatches between where value is created in the business and where profits / losses are being recognised. Appropriate TP policies can remove this misalignment and can lead to increased tax efficiency.
• Cash repatriation – A flexible TP framework can efficiently repatriate profits to service debt or for investment. It can also facilitate the provision of funding to where it is needed in the group.
• Exit readiness – TP is a material area under due diligence. We are increasingly seeing TP disputes during a transaction that result in a price-chip. Having a defensible TP policy can reduce this risk considerably.
• Expansion - A robust TP model from the outset provides a model that is scalable and flexible for international growth and future changes to the business model.

Intangibles and royalties

• We have seen an increased focus by HMRC on the TP implications of valuing intangibles. This is particularly relevant where intangibles are being moved into / out of the UK (which may trigger an exit charge), or the legal owner of the intangible is different from the entity carrying out the important activities relating to the intangibles.
• Tax authorities are targeting IP-rich businesses with cross-border royalty payments. For example, HMRC has been focusing on UK companies making outbound royalty payments to connected parties overseas. Many of these companies are being asked to provide evidence of the arm’s length nature of the arrangement.

Management services

• We have seen instances where a UK head office is providing management services to overseas group entities, but these are not being charged for. As such, the group may be losing out on i) tax deductions overseas, ii) positive UK cash receipts, and/or iii) the ability to utilise UK losses.
• Management service recharges are often scrutinised, as the underlying methodology can be subjective and often inadequately supported. Robust documentation is therefore required to support the arm’s length nature of the arrangement.

Intra-group financing

• Many groups are funded by intra-group debt and rely on earnings-based financial ratios to arrive at a deductible amount of interest.
• It is important that these calculations are revisited when the capital structure changes or if financial performance deteriorates, as this could change the amount of deductible arm’s length interest in the tax return.

Restructuring

• Group restructuring includes acquisitions, disposals, migrating assets out of the UK, and any changes to the operating model. These events may often give rise to material TP issues that need to be properly understood.
• In recent years, supply chains have been under considerable strain, and are being adapted to become more resilient and agile. Changes to existing supply chain models can change intra-group supply arrangements, which may impact the approach to TP.

‘Working from anywhere’

• In recent years, we have seen many high-value employees moving to reside / work in a different jurisdiction. This may trigger permanent establishment and substance risks, which can change how profits should be allocated under TP principles.

Approval code: NTAJ14032325