Action 13 of the action plan on Base Erosion and Profit Shifting (BEPS) is concerned with supplying the tax administration with sufficient information to allow them to assess transfer pricing risk. The guidance issued by the OECD in September 2014 therefore contains new standards for the preparation of transfer pricing documentation including a template for reporting of income, earnings, tax and some measures of economic activity on a country by country basis. The information would include the total employments, capital, earnings and tangible assets in each jurisdiction in which entities of the group operate. This would be supplemented by a list of the identity of each entity and a description of its business activities. The OECD guidelines will be updated with guidance on the preparation of the master file, local file and country by country reporting.

Master file

The master file is intended to supply general information to the tax administration on the multinational group to which the taxpayer belongs. The information contained in the master file can be categorized as follows:

• The organization structure of the group;
• A description of the business of the group;
• Intangible assets employed by the group;
• Intragroup financial activities; and
• The financial and tax positions of the group.

The master file ensures that the activities of the multinational group are put into their global economic, financial and tax context.

Local file

The local file is concerned with the related party transactions undertaken by the local taxpayer. This includes a description of the transactions, comparability analysis, the selection of the transfer pricing method and how it was applied. In some cases it may be possible to save time by cross-referencing to the master file in respect of some transactions.

The information in the local file in respect of the local entity would include the following:

• Description of the management structure of the local entity with an organization chart;
• Description of the business and the strategy followed including information with respect to business restructurings or the transfer of intangible assets and their effect on the local entity;
• Information on the main competitors.

Information on related party transactions would include the following details:

• A description of the main controlled transactions and the context in which they were carried out;
• The amount of the intragroup receipts and payments broken down according to each category of transaction such as products, services or interest and according to the jurisdiction in which the related party is located;
• Identification of the related party and the nature of the relationship;
• Intercompany agreements;
• A comparability analysis and functional analysis for the taxpayer and the related parties involved in the transactions;
• The reasons for choosing the transfer pricing method and why it was the most appropriate;
• Identification of the tested party and why this party was selected as the tested party;
• If a multi year analysis is performed, an indication of the reasons for this;
• A description of the comparable uncontrolled transactions selected and details of any relevant financial indicators of independent parties used in the analysis;
• Identification of any comparability adjustments made;
• Reasons why it is considered that the transactions were at arm’s length;
• A description of the financial information used in the analysis;
• Copier of relevant advance pricing agreements and tax rulings in relation to the transactions.

The local file would also include financial information including local entity financial accounts, schedules indicating how this financial information is related to the financial data used in applying the transfer pricing methods; and summary schedules of financial date for comparables used in the analysis.

Country by Country report

The addition of the country by country report to the transfer pricing documentation permits the tax authorities to gain a view of the profits earned within the whole group and the tax paid. The report also includes indicators of economic activity of group entities within each jurisdiction where the group operates. The report contains a list of the constituent entities for which the group reports financial information, their main business activities and the tax jurisdiction in which these entities are resident.

The purpose behind the requirement to complete the country by country report is to allow the tax administration to make a transfer pricing risk assessment of the group and to evaluate other risks in areas covered by the OECD’s base erosion and profit shifting (BEPS) project. The report therefore contributes to the ability of the tax administration to draw up a general tax risk assessment.

General documentation requirements

The OECD considers that best practice would require the local file to be completed by the due date for filing the tax return for the relevant year and that the master file should be updated by the due date for the tax return of the ultimate parent of the group to be filed. Some countries may require certain information to be made available to them before the tax return is filed, depending on their auditing policies. In the case of the country by country report this cannot be completed until all the relevant financial information is available. The OECD guidance therefore suggests that the country by country report should be filed by one year after the last day of the fiscal year of the ultimate parent company of the multinational group.

The OECD recommends that the transfer pricing documentation should be reviewed at regular intervals and that the master file, local file and country by country report should be updated annually. Relevant documents would need to be retained for a reasonable period, and tax administrations should request documentation for prior years only when they have a good reason for wanting to review these documents, connected to their examination of a particular transaction. The transfer pricing documentation requirements in each country should also include certain materiality thresholds that are based on the size and characteristics of the local economy and the size and nature of the multinational group.