One of the many aspects of Transfer pricing (TP) compliance is adhering to the documentation requirements. As transfer pricing regulations develop the documentation requirements develop as well and become a more present part of TP compliance.
The framework for those requirements is described in Chapter V of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 (the OECD guidelines) and Action 13 of the BEPS Project. Most countries base their local requirements on this framework. The specific requirements vary from country to country and can include the preparation of documentation, its submission, and more.
In this article, we’ll review the OECD framework and provide a few examples of documentation requirements worldwide. To read about transfer pricing regulations in specific countries, click here.
The purpose of TP documentation
Let’s start with understanding why documentation is needed. The documentation serves three main purposes:
- To ensure that the taxpayer considers the transfer pricing requirements when setting the conditions of a transaction.
- To provide tax authorities with the needed information to do a transfer pricing risk assessment.
- To provide tax authorities with information that can be used through a transfer pricing audit.
To achieve those goals a three-tiered approach was introduced in the OECD guidelines. This approach consists of three types of documentation, local file, master file, and Country-by-Country report (CbCr).
The content of the documentation is designed in a way that is meant to balance the compliance cost and burdens of the taxpayers with the tax authorities’ need for information and concerns about its misuse.
Local File
The purpose of the local file is to provide detailed information about specific intercompany transactions. The information presented in it focuses on the transactions between a local entity and its related parties. For example, comparability analysis, selection of a transfer pricing method, etc.
Tax authorities usually require that the local file will be prepared in the local language.
Master File
The purpose of the master file is to provide a high-level overview of the multinational enterprise (MNE) group’s business. For example, global transfer pricing policies, allocation of income and economic activities, etc. The master file is not intended to provide in-depth information, but rather allow the tax authorities to place the MNE group’s TP strategy in the global context.
Country-by-Country Report
The purpose of the CbCr is to provide aggregated tax jurisdiction-wide information about the allocation of income, taxes, and activities among the group’s entities.
Most OECD members introduced the requirement to submit a CbCr into their local legislation starting in the 2016 fiscal year. The thresholds for submission usually include the following:
- Total consolidated revenue of €750 million (or the local currency equivalent).
- The Ultimate Parent Entity of the MNE is located in the jurisdiction.
The information reported is shared with the tax authorities in the countries with other group entities. This is possible due to the automatic information exchange agreements that tax authorities have signed.
Examples from Around the World
The local regulations can vary dramatically depending on the countries in which the group operates. Some countries require the preparation of documentation and submission only upon request. While others require certain taxpayers to submit the documentation with the tax returns.
For example, Dutch regulations require taxpayers to prepare local and master files if the group’s consolidated revenue is above €50 million. The Uruguayan regulations require entities that have to submit CbCr to also submit a master file.
Adhering to the different transfer pricing documentation requirements worldwide can be complicated and recourse-heavy. Therefore, it is important to work with a TP expert who is familiar with global regulations. Our firm assists our clients with all of their TP documentation and compliance matters worldwide. Click here to contact a team member.