TP Back to Basics – Transfer Pricing Documentation

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This article is accompanied by a slide presentation on YouTube. Feel free to use my material for your own in-house purposes, all I ask is that you acknowledge the source.


Chapter 5 of the “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (the “Guidelines”) provides guidance for tax authorities on developing rules for transfer pricing documentation and guidance for multinational enterprises (MNEs) on the standard of transfer pricing documentation that would be most helpful for demonstrating that their controlled transactions are conducted on an arm’s length basis.

This article looks at the key elements of Chapter 5 and concludes with my thoughts on best practice regarding the UK and HMRC’s TP documentation requirements. It is summarised in a slide presentation on YouTube.

This is the first in a series of articles which examines the Guidelines, the original wording of the Guidelines has been retained in places for clarity and the avoidance of doubt.

The TP Guidelines are freely available to view on the OECD website and should be referred to for more detail.

Objectives of transfer pricing documentation

Tax administrations often find that transfer pricing documentation provided by MNE’s is less than fully informative and not adequate for their tax enforcement and risk assessment needs.

However, an overarching consideration in the development of transfer pricing documentation rules is to balance the usefulness of the data to tax authorities with any increased compliance burden on taxpayers.

Nevertheless, it is important that taxpayers carefully evaluate, at or before the time of filing their tax return, their compliance with the transfer pricing rules that apply to them. It is also important that tax authorities be able to access the information they need to conduct a transfer pricing risk assessment to make an informed decision about whether to perform an enquiry.

By requiring taxpayers to articulate convincing, consistent and cogent transfer pricing positions, transfer pricing documentation consistent with the OECD Guidelines can help to ensure that a culture of compliance is created. Well-prepared documentation will give tax authorities some assurance that the taxpayer has analysed the positions it reports on tax returns, has considered the available comparable data, and has reached consistent transfer pricing positions. Moreover, contemporaneous documentation requirements will help to ensure the integrity of the taxpayers’ positions and restrain taxpayers from developing justifications for their positions after the fact.

A three-tiered approach to transfer pricing documentation

In order to achieve the above objectives, the Guidelines state that countries should adopt a standardised approach to transfer pricing documentation and describe a three-tiered structure consisting of:

  1. a master file containing standardised information relevant for all MNE group members;
  1. a local file referring specifically to material transactions of the local taxpayer; and
  1. a Country-by-Country Report containing certain information relating to the global allocation of the MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group.

The Guidelines state that this approach to transfer pricing documentation will provide taxpayers with a means and an incentive to meaningfully consider and describe their compliance with the arm’s length principle in material transactions. It will also provide tax authorities with relevant and reliable information to perform an efficient and robust transfer pricing risk assessment analysis and a platform on which the information necessary for an enquiry can be developed.

1. Master file

The master file should provide an overview of the MNE group business. Taxpayers should use prudent business judgment in determining the appropriate level of detail for the information supplied, keeping in mind the objective of the master file to provide tax authorities a high-level overview of the MNE’s global operations and policies. Information is considered important if its omission would affect the reliability of the transfer pricing outcomes.

The master file should contain relevant information grouped in five categories as follows:

  1. the MNE group’s organisational structure;
  1. a description of the MNE’s business or businesses;
  1. the MNE’s intangibles (as defined in Chapter 6 of the Guidelines);
  1. the MNE’s inter-company financial activities; and
  1. the MNE’s financial and tax positions.

Annex I to Chapter 5 of the Guidelines gives a detailed list of the information to be included in the master file under each of the above 5 headings.

2. Local file

The local file should provide more detailed information relating to specific inter-company transactions. The information required in the local file supplements the master file and helps to meet the objective of assuring that the taxpayer has complied with the arm’s length principle in its material transfer pricing positions affecting a specific jurisdiction. The local file focuses on information relevant to the transfer pricing analysis related to transactions taking place between a local country affiliate and associated enterprises in different countries and which are material in the context of the local country’s tax system.

Annex II to Chapter 5 of the Guidelines sets out the items of information to be included in the local file.

3. Country-by-Country Report

The Country-by-Country Report requires information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates. The report also requires a listing of all the Constituent Entities for which financial information is reported, including the tax jurisdiction of incorporation, where different from the tax jurisdiction of residence, as well as the nature of the main business activities carried out by that Constituent Entity.

Note that the information in the Country-by-Country Report should not be used as a substitute for a detailed transfer pricing analysis of individual transactions and prices based on a full functional analysis and a full comparability analysis.

Annex III to Chapter 5 of the Guidelines contains model templates for the Country-by-Country Report together with accompanying instructions.

Compliance issues

1. Contemporaneous documentation

The Guidelines recommend that taxpayers should determine their transfer prices for tax purposes in accordance with the arm’s length principle, based upon information reasonably available at the time of the transaction, and confirm the arm’s length nature of their financial results at the time of filing its tax return.

2. Time frame

The Guidelines recommend that best practice is for the local file to be finalised no later than the tax return filing date for the year in question. The master file should be reviewed and, if necessary, updated by the filing date for the ultimate parent of the MNE group.

3. Materiality

The Guidelines recommend that individual countries should establish their own materiality standards for local file purposes.

The Country-by-Country Report should include all tax jurisdictions in which the MNE group has an entity resident for tax purposes, regardless of the size of business operations in that tax jurisdiction.

4. Retention of documents

Taxpayers should not be obliged to retain documents beyond a reasonable period consistent with the requirements of domestic law at either the parent company or local entity level.

The way that documentation is stored should be at the discretion of the taxpayer provided that relevant information can promptly be made available to the tax administration in the form specified by the local country rules and practices.

5. Frequency of documentation updates

The Guidelines recommend that the master file, the local file and the Country-by-Country Report should be reviewed and updated annually, to ensure that the functional and economic analyses are still accurate and relevant and to confirm the validity of the applied transfer pricing methodology.

The guidelines also recommend that tax authorities may determine, as long as the operating conditions remain unchanged, that the searches in databases for comparables supporting part of the local file be updated every three years rather than annually. Financial data for the comparables should nonetheless be updated every year in order to apply the arm’s length principle reliably.

6. Language

The necessity of providing documentation in local language may constitute a complicating factor with respect to transfer pricing compliance to the extent that substantial time and cost may be involved in translating documents. Countries are encouraged to permit filing of transfer pricing documentation in commonly used languages where it will not compromise the usefulness of the documents.

7. Penalties

Penalty regimes are governed by the laws of each individual country and country practices with regard to transfer pricing documentation-related penalties vary widely.

In some jurisdictions where the taxpayer bears the burden of proof regarding transfer pricing matters, a shift of the burden of proof to the tax administration’s side where adequate documentation is provided on a timely basis offers another measure that could be used to create an incentive for transfer pricing documentation compliance.

8. Confidentiality

Tax administrations should take all reasonable steps to ensure that there is no public disclosure of confidential information (trade secrets, scientific secrets, etc.) and other commercially sensitive information contained in the documentation package (master file, local file and Country- by-Country Report). Tax administrations should also assure taxpayers that the information presented in transfer pricing documentation will remain confidential.

9. Other issues

The requirement to use the most reliable information will usually require the use of local comparables over the use of regional comparables where such local comparables are reasonably available.

The use of regional comparables in transfer pricing documentation prepared for countries in the same geographic region in situations where appropriate local comparables are available normally will not comport with the obligation to rely on the most reliable information.

While the benefits of limiting the number of comparable searches a company is required to undertake are obvious, and materiality and compliance costs are relevant factors to consider, a desire for simplifying compliance processes should not go so far as to undermine compliance with the requirement to use the most reliable available information.


The Guidelines recommend it is essential that the guidance in chapter 5, in particular the Country-by-Country Report (CbCR), be implemented effectively and consistently. As of 22 December 2017, 61 countries including the UK have implemented CbCR with a further 19 in progress. Similarly, 30 countries have implemented master/local file documentation requirements with a further 22, including the UK, in progress.

The UK’s (i.e. HMRC’s) current guidance on transfer pricing documentation states that it “does not want businesses to suffer disproportionate compliance costs so customers should prepare and retain such documentation …… which adequately demonstrates that their transfer pricing meets the arm’s length standard.” It then directs readers to the OECD Guidelines as follows “The OECD Guidelines at Chapter V contain recommendations about transfer pricing documentation” so it’s clear that the 3-tier approach will satisfy HMRC.

HMRC states that transfer pricing documents prepared in accordance with the EU’s Code of Conduct on transfer pricing documentation [‘EUTPD’] are also acceptable. There is overlap between the OECD 3-tier approach and the EUTPD Code of Conduct and documentation which is consistent with the OECD’s Chapter 5 recommendations should also satisfy the EUTPD Code of Conduct.

Whilst international coverage still has some way to go and there are local variations amongst those countries that have implemented, it is recommended that MNEs should now be preparing their transfer pricing documentation following the OECD’s recommended 3-tier model.

Best Practice

  1. Follow the OECD Guidelines on transfer pricing documentation, even if it’s not yet required by your local tax administrations.
  2. Don’t lose sight of the overarching objective of your TP documentation, which is to educate tax authorities about your business and demonstrate that all aspects of your controlled transactions are consistent with the arm’s length principle. Step back and ask what the documentation says about your business and its transfer pricing. Ensure that the documentation supports your position and can’t easily be used against you by tax administrations. Consider hiring an independent transfer pricing specialist with experience of the local tax authorities to audit your documentation so you can correct any anomalies or discrepancies before releasing it. At the very least you’ll be forewarned and better prepared for any potential challenges. Do the job properly and thoroughly and you’ll have fulfilled your legal obligations. Unfortunately it doesn’t follow that tax authorities will agree with you, but the burden of proof will be transferred to the tax authorities if they don’t agree.
  3. Check your ratios against the OECD CbCR Handbook on Effective Tax Risk Assessment. This lists 19 risk indicators and is a useful reference, especially the case study. This will help you prepare for tax administration scrutiny.
  4. The preparation of the master file is often a trade-off between the costs of giving too much information and the risks of not giving enough. Around 60 pages of text and diagrams is about right. The local file will probably be around 80 – 100 pages, excluding any agreements and other documentation you refer to in the main text.
  5. Beware of using regional or global comparables for your local file, unless you can clearly demonstrate that these are more reliable than local comparables. This may drive down your compliance costs but the local tax authority is likely to view this for what it probably is; a cost-saving short-cut which casts doubt on the reliability of the entire report, which may lead to a lengthy and expensive enquiry. Again best practice is to follow the OECD Guidelines.
  6. Another short-cut guaranteed to alert the tax authority is the absence of segmentation in your report when it’s clearly appropriate. Often the local entity is tested as if it only performed a single function whereas in reality it probably performs several. Some of these may be insignificant and can be ignored for the benchmarking exercise, but others may have a material impact on the outcome if not segmented.
  7. Choose a reasonable transactional threshold, at least in line with any local requirements.
  8. The OECD three-tier approach to TP documentation should ensure cross-border consistency, but where local files are prepared separately by local group companies there should be some oversight to ensure that transactions are described consistently from both sides.
  9. Ensure you keep copies of your TP documentation and associated data in a central archive, so it’s not left stranded on somebody’s hard-drive when they leave the group.
  10. Keep a log of any discrepancies or anomalies you encounter during the year so they can be corrected at the next annual review.

About the Author

Gordon McLeman: Until recently Gordon was employed as a Senior Transfer Pricing Specialist in the UK with HM Revenue & Customs. His role included membership of HMRC’s Transfer Pricing Governance Panel and involved financial, widget and intellectual property transfer pricing across a wide range of industries. Gordon has extensive HMRC TP risk-assessing and case-working experience and now sense-checks TP documentation for clients to identify areas that may trigger “potential TP risk” alarm bells within HMRC, so they can be corrected, clarified or expanded before release of the documentation to HMRC. To find out how Gordon can help you please use the “contact me” tab above or email him directly.


I try to make the contents of this website as useful, reliable and factual as possible but any opinions that slip through are solely my own.

The purpose of the site is to inform and educate readers with guidance and useful tips. It provides only an overview of the regulations and guidance in force at the date of publication and is not a substitute for professional advice. The contents are not designed to provide professional advice or financial advice and should not be relied on as such.

You should not base any action on the contents of this website without first obtaining specific professional advice, tailored to the facts and circumstances of your situation, from an appropriately qualified Transfer Pricing expert. (I may be able to help with your TP documentation if you contact me directly – see side banner)

No responsibility for loss occasioned by any person acting or refraining from action as a result of the contents of this Website can be accepted by the author.


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