In its action plan for combating base erosion and profit shifting the OECD made a commitment to developing recommendations on transfer pricing documentation rules. The aim would be to increase the level of transparency of transfer pricing information without adversely affecting compliance costs for taxpayers. Multinational enterprises would be required to supply governments with full details of their cross-border activities, allocation of income and taxes paid in each country. If this information is presented in standard format it can help tax administrations to identify transfer pricing risks.

In addition to looking at the current position with respect to transfer pricing documentation and examining the purposes of preparing this documentation, the white paper puts forward suggestions for adapting the rules to make the transfer pricing documentation simpler and at the same time more useful for tax administrations. Documentation could be more focused on the objectives for which it is prepared and if it provides more of a high level picture presented in a standard format it could be more useful to tax administrations. The paper backs a two tiered approach in which high level general information may be put forward for the purposes of risk assessment and more detailed information may be submitted when tax administrations are examining the extent to which particular transactions have been performed at arm’s length.

According to the OECD white paper the types of transaction that are indicators of transfer pricing risk include business restructuring; the transfer of intangible assets to related parties; transactions with related parties in low tax jurisdictions; related party payments of interest, insurance or royalties that could erode the tax base; consecutive years of loss making; excessive debt or a lack of information on related party transactions. The provision of high level information on group activities and profit allocation could help to identify these areas of transfer pricing risk. Details of the global allocation of income could be drawn from the management accounts, audited financial statements or tax returns of companies in a group. The information relating to allocation of information between countries would reveal for example the extent to which the group has allocated income and assets to low tax jurisdictions.

However this type of high level information is not enough to give a complete picture of transfer pricing within a group. The documentation will continue to require content relating to the selection of transfer pricing methods, comparability analysis outlining the functions, assets and risks of the parties and details of dates and amounts of transactions.

The OECD is inviting comments on how the transfer pricing documentation may be improved and standardized, and on whether additional mechanisms may be developed in response to the call in the global action plan for improved transfer pricing documentation. Comments should be sent to the OECD by 1 October 2013.