Among the biggest changes in transfer pricing documentation and reporting over the past few years are the maintenance of both master and local files as specified in the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Sharing (BEPS) action items.
Prior to the introduction of BEPS in 2017, the OECD standards were nebulous, specifying only that documentation should “reasonably” demonstrate that the arm’s length standard was used to establish transfer pricing. Under this subjective standard, some companies provided minimal information to tax authorities, complicating efforts to ensure compliance. In addition, many jurisdictions required primarily documentation related to the local company and thus lacked the context of the parent enterprise’s transfer pricing practices.
The OECD’s goals in adopting new BEPS guidelines were to increase transparency and standardize the documentation taxpayers are required to provide to ensure tax authorities have the necessary information to assess transfer pricing policies.
To address these goals, the BEPS guidelines established a three-tiered approach for documenting intercompany transactions, requiring companies to prepare a master file, a local file, and a country-by-country report. This tiered documentation is intended to provide tax authorities in all jurisdictions with the context required to verify compliance.
This standardized approach also seeks to achieve three objectives. The first is for companies to self-assess compliance with the arm’s length principle. The second is to provide tax authorities with a means of identifying potentially risky transfer pricing, while the third is to provide them with a specified level of information about the taxpayer in the event of an audit.
In this article, we’ll review the local file and transfer pricing master file requirements and look at how transfer pricing local file templates may vary from one jurisdiction to another.
The master file provides a global overview of the enterprise’s transfer pricing. It includes high level information about the company’s global operations and transfer pricing policy. The OECD has developed an outline of the information that should be included in the master file. For the most part, every country has adopted the OECD master file guidelines:
The master file is compiled at the enterprise level, typically the parent company. BEPS guidelines suggest that the master file be made available to tax authorities in the jurisdictions where the enterprise has business operations and many tax authorities have adopted the master file as a requirement in their own legislation.
While the BEPS guidelines stipulate the required information, there is some flexibility in how companies can present or format the information. The enterprise’s OECD master file may, for example, be presented by line of business, as long as centralized functions and transactions are thoroughly documented. Although the master file needs to be available to local tax authorities, it does not have to be compiled by each business entity—only by the parent company.
The master file represents an opportunity to explain transfer pricing policy to tax authorities. Although following the guidelines requires some taxpayers to provide much more extensive information than they previously had, the transfer pricing master file requirements introduced a level of security for companies that carefully apply the arm’s length principle in their intercompany transactions.
What’s most important in preparing the master file, aside from including the required documentation, is avoiding risk. Discrepancies or contradictions between information in the master and local files increase audit risk, so it’s critical to make sure the descriptions that are provided in the files are consistent.
The local file preparation is specific to each country to document the activities of the business units operating in that specific jurisdiction. The local file provides detailed information about the local company’s intracompany transactions. Local files are filed with the tax authority for the jurisdiction.
As with the master file, BEPS has guidelines for the information that should be included in local files. BEPS local file requirements include these details:
While many countries have adopted the OECD’s transfer pricing local file template, some have tweaked it with requirements for additional information or with a specific format for ordering the information. In these jurisdictions, the information stipulated for OECD requirements will be the same; the difference is that the specific jurisdiction may require additional information or have unique stipulations as to how the information is presented.
As already noted, ensuring that the information in the local file is consistent with information in the master file is crucial. Disparities can create audit risks.
Country-by-Country ReportsThe country-by-country reports that comprise the other tier of BEPS documentation essentially summarize the activities of all the enterprise’s related entities doing business within the jurisdiction. These may be compiled from information already assembled for the master and local files—but require a designated person or team to ensure that the required documents are collected, assembled, and filed on time. Consult the OECD’s Guidance on the Implementation of Country-by-Country Reporting for additional information. |
The first step in avoiding audits and penalties is to make sure all required documentation is prepared on time, and submitted to the tax authority if necessary.
Due to the increased complexity of the three-tiered approach introduced by BEPS, a detailed work plan to meet important deadlines and successfully manage the compliance process is critical. Developing this plan is a challenge in itself, so Valentiam has designed a scalable work plan with timelines and task lists to serve as a work plan template. You can read more about the work plan, or download the free template.
Although the OECD BEPS requirements introduced a more complex documentation regimen, companies can more easily assess their compliance with the arm’s length principle in their transfer pricing plan—and reduce their risk of audit by complying with all requirements. However, companies with complex international business structures that conduct large volumes of intracompany transfers may want to seek out the guidance of third-party transfer pricing specialists—like the team at Valentiam—to ensure all BEPS requirements are being addressed.
At Valentiam, our team of transfer pricing specialists delivers thoughtful and innovative transfer pricing strategies to maximize company profits and minimize audit risk. We can help with your unique transfer pricing challenges and compliance with OECD regulations. Schedule a free discovery call today to see how Valentiam can help your company.