UK: HMRC publishes guidance on transfer pricing records for PEs

The United Kingdom (UK) HRMC has issued guidance on the transfer pricing records requirements for permanent establishments (PEs) in accordance with the amendments made by Finance (No. 2) Act 2023.

The Local files and Master files requirements for transfer pricing were formally introduced after the UK government published the Transfer Pricing Records Regulations 2023. Amendments were made to the regulations as part of the Finance (No. 2) Act 2023. The UK enacted the Finance (No.2) Act 2023 on 11 July 2023.

The transfer pricing records legislation (INTM450021) does not apply to permanent establishments that are part of an MNE group that meets the CbCR threshold.

That is because Schedule 5 to Finance (No. 2) Act 2023 defines the relevant transfer pricing records as records that may relate to the calculation of profits or losses under Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). The calculation of the chargeable profits of a non-resident carrying on a trade through a permanent establishment in the UK is undertaken in accordance with sections 19 to 32 of Chapter 4 of the Corporation Tax Act 2009. Further guidance on the attribution of profits to permanent establishments can be found at INTM267000 onwards.

As a result, there are no specific record keeping requirements for permanent establishments beyond the general duty to keep and preserve such records as are required to make and deliver a correct and complete return.

The attribution of profits to a permanent establishment nevertheless draws heavily on the principles in the Transfer Pricing Guidelines. HMRC, therefore, considers that the documentation standards set out in the 2022 Transfer Pricing Guidelines represent an appropriate way to demonstrate that the profits of a permanent establishment have been calculated in accordance with the arm’s length principle and correctly attributed to that entity and so groups may choose to include details of transactions concerning permanent establishments in their Local File to maintain a single set of documents covering their related party transactions.

Additional documentation beyond the OECD standard will be required to record the existence of a permanent establishment and the characterisation and terms of any dealings between the PE and the rest of the enterprise. HMRC considers that reasonable efforts should be made at the time the pricing of any dealings is determined to ascertain, and document, whether that profit is in accordance with the arm’s length principle. This follows the recommendations set out in section D-4 of the 2010 OECD Report on the Attribution of Profits to Permanent Establishments (‘AOA’).

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