News Alert: Recent Development in Transfer Pricing Legislation in UK, Brazil, and Canada
August 22, 2023
At a glance
- The main takeaway: The UK, Brazil, and Canada have all introduced new transfer pricing regulations to align with global standards.
- Impact on your business: These new guidelines emphasize transparency and compliance through a variety of tools, including new documentation requirements.
- Next steps: Multinational corporations should review existing transfer pricing strategies and assess what changes are needed to align with the new guidelines. Schedule a consultation with Aprio’s Transfer Pricing team to get started.
The full story:
In a significant move that impacts global business landscapes, the United Kingdom, Brazil, and Canada have recently introduced new transfer pricing regulations. These changes are poised to reshape the way multinational companies conduct cross-border transactions, emphasizing transparency, fairness, and stricter compliance with the arm’s length principle.
The United Kingdom has introduced a series of amendments to its transfer pricing framework, demonstrating its commitment to modernizing its tax regime and aligning with the OECD Guidelines. Notable highlights of the new legislation include:
- Updated Documentation Requirements: The new regulations impose enhanced documentation requirements on multinational companies engaging in intercompany transactions. This aims to provide tax authorities with a comprehensive overview of these transactions, ensuring transparency and reducing the potential for transfer pricing disputes.
The changes apply to all companies with Group revenue exceeding consolidated Group revenue of €750m in the period in question, which is the same revenue level as the CbCR threshold. When applicable, companies are now required to provide detailed documentation supporting their transfer pricing methodologies and justifications, including:
- A Master File, which sets out an overview of the group’s business, the nature of its global operations, its value drivers, its overall transfer pricing policies and its global allocation of income and economic activity. Ideally, this should include a detailed value chain analysis considering how different parts of an international group work together to create value and defining value created by each of those parts.
- Local country files, which incorporate details of material intragroup transactions for the local taxpayer for the year and supporting pricing analysis for each entity.
Taxpayers can likely expect that a Summary Audit Trail (“SAT”) filing will be required in the future as standard TP documentation in the UK. The SAT was envisioned to be an additional filing to the Local File, in the format of either an International Dealings Schedule or a short questionnaire form summarizing the work undertaken by the taxpayer in reaching the conclusions set out in their Local File. However, this requirement has been delayed as His Majesty’s Revenue and Customs (“HMRC”) has decided that more consultation is needed.
Brazil has embarked on a significant overhaul of its transfer pricing regulations, focusing on aligning its practices with OECD Guidelines. Key highlights of the recent changes include:
- Alignment with OECD Guidelines’ Transfer Pricing Framework: One June 14, 2023, Brazil signed into law the new Brazilian transfer pricing framework to abandon the longstanding “market price threshold model” Brazil has used for decades as its transfer pricing methodology. The new transfer pricing framework will formally adopt and align with the global standard, OECD Guidelines Transfer Pricing Framework. Taxpayers must inform the Brazilian Tax Authorities (RFB) between September 1, 2023, and September 30, 2023, if they intend to adopt for the current fiscal year 2023. The new transfer pricing framework will be mandatory for all taxpayers as of January 1, 2024. More formal instructions have not yet been published.
By aligning with the OECD Guidelines, this will likely remove one of the main obstacles associated with foreign tax credit recognition in the United States arising from income tax paid and/or withheld in cross-border transactions involving Brazil. No formal guidance has yet been published by Treasury or the IRS.
Canada has taken steps attempting to strengthen its transfer pricing regulations with goals to align more with the OECD Guidelines, curb abuse, and safeguard its tax base. The recent proposed amendments currently under commentary include:
- Strengthening Documentation Requirements: Canada’s updated regulations emphasize the importance of detailed documentation. Multinational companies are now required to provide comprehensive information about their transfer pricing methodologies, assumptions, and justifications.
Specifically, the Canada Revenue Agency (CRA) is proposing changes to the interpretation of the arm’s length principle that will focus on “economically relevant circumstances” determined by the functional circumstances, as opposed to its previous focus on a company’s structured legal rights and obligations in contracts.
- Setting de minimus thresholds and small taxpayer requirements
- Setting safe harbor interest rates
- Adopting the Master File/Local File documentation format
- Increasing penalty thresholds
The bottom line
These regulatory changes reflect the global trend towards global taxation standardization, increased transparency, and the elimination of profit shifting practices. Multinational corporations are strongly advised to review and adapt their transfer pricing strategies to align with the new legislative frameworks.
For comprehensive insights into how these legislative updates could impact your specific business operations, we recommend seeking guidance from our experienced transfer pricing professionals.
Stay informed, stay compliant!
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About the Author
Carl is a Transfer Pricing Senior Manager with Aprio’s International Tax team. He advises multinational and domestic businesses on intercompany transactions of tangible goods, intangible property, services, and loans. Passionate about helping businesses grow, Carl has helped many clients, including a recent client save $1 million in US tax annually through the use of transfer pricing.