On 30 January 2014, as part of the action plan on base erosion and profit shifting, the OECD published a discussion draft on transfer pricing documentation. This discussion draft takes the form of a revised Chapter V of the OECD Transfer Pricing Guidelines.  The aim is to help tax administrations in drafting appropriate transfer pricing documentation rules and to assist taxpayers in identifying the most helpful documentation to demonstrate their compliance with the arm’s length principle.

The discussion draft identifies three objectives for preparing transfer pricing documentation. The documentation provides the tax administration with the details they need to assess the transfer pricing position. The document requirement also ensures that taxpayers consider the transfer pricing rules when they are arriving at a price for related party transactions and reporting the income in their tax returns. Documentation also provides the necessary information for the tax administration to conduct tax audits in an efficient manner. The tax administration needs to obtain sufficient details to perform a risk assessment so they can optimize the use of their limited resources. For this assessment they must access appropriate information at an early stage and the transfer pricing documentation should enable them to do this.

The discussion draft includes a two-tiered approach to documentation requirements including a master file with information on all members of the multinational group and a local file containing information relevant to the material transactions of the local taxpayer.

The master file would allow the tax administration to obtain a complete picture of the global business of the multinational group including financial reporting, debt structure, tax situation, allocation of group income, economic activity and the tax payments. The master file could be prepared for the whole of the group’s business or for each particular line of business, depending on which is most useful to the tax administration. The information in the master file would include relevant information on the organizational structure of the group, a description of the business, intangible assets held, intragroup financial transactions and the financial and tax position of the whole group. The section of the master file on the financial and tax position of the group would include country by country reporting on information relating to the global allocation of profits, taxes paid and indicators of the location of economic activity in the countries where the group operates.

The local file would include information on material transactions between the group member in the local country and the rest of the multinational group. This would include relevant financial details on specific transactions, the comparability analysis, the choice of the most appropriate transfer pricing method and the way in which it is applied in the relevant fiscal year.

Generally the two tiered approach to documentation aims to increase the amount of information available to the tax authorities while reducing compliance costs for the taxpayer. Taxpayers may however be concerned that the necessity for the group to put together the master file may increase compliance costs.  There may also be confidentiality concerns for the taxpayer as some members of the group may have legitimate business reasons for keeping some information confidential from other members of the multinational group.  The country by country reporting requirements would also involve increased compliance costs to collect information that is not necessarily of significant use to the tax authorities.  Taxpayers concerned about these issues have the chance to send their comments to the OECD on or before 23 February 2014.