Action 13: Re-examination of Transfer Pricing Documentation – Q&A
Friday, January 01, 2016
The following outlines the Q&A section of the OECD “BEPS – Frequently Asked Questions” website page related to Action 13 which relates to the re-examination of transfer pricing documentation:
78. What information will be included in the TP Master File and Local File?
The guidance on transfer pricing documentation requires MNEs to provide tax administrations high-level global information regarding their global business operations and transfer pricing policies in a “master file” that would be available to all relevant country tax administrations. It also requires that more transactional transfer pricing documentation be provided in a “local file” in each country, identifying relevant related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions.
79. What is Country-by-Country (CbC) reporting?
Country-by-Country Reporting is a tool intended to allow tax administrations to perform high-level transfer pricing risk assessments, or to evaluate other BEPS-related risks. The country-by-country reporting template will require multinational enterprises (MNEs) to provide annually and for each jurisdiction in which they do business, aggregate 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, as well as information about which entities do business in a particular jurisdiction and the business activities each entity engages in.
80. Will this information be made public?
The information must be provided to the relevant governments; to protect the confidentiality of potentially sensitive information, it will not be made publically available. This is consistent with the treatment of most other taxpayer information.
81. How will the information be provided to tax authorities?
The master file and the local file will be delivered by MNEs directly to local tax administrations. Country-by-Country Reports should be filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties, or Tax Information Exchange Agreements (TIEAs). In limited circumstances, secondary mechanisms, including local filing can be used as a backup.
82. How will the information be used?
Taken together, the three documents (the Country-by-Country Report, TP master file and TP local file) will require taxpayers to articulate consistent transfer pricing positions, and will provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, commence and target audit enquiries.
83. Will developing countries also obtain this information?
Certainly. Countries which fulfil the conditions of confidentiality, consistency, and appropriate use, may obtain the data provided by MNEs in their country-by-country reports under exchange agreements, or in certain circumstances through local filing. At the same time, it is recognised that developing countries may require support for the effective implementation of country-by-country reporting. Developing countries will be also involved in the elaboration of a toolkit on transfer pricing documentation, as requested by the G20, in order to implement the results of the work in this area. This additional work will be completed by June 2016.
84. What happens if a country does not require the filing of the Country-by-Country reporting?
When the ultimate parent company is not obliged to file in its jurisdiction, a secondary mechanism involving a local filing obligation on a resident subsidiary would be accepted. Where there are multiple subsidiaries in a jurisdiction, the MNE group can designate one to file on behalf of all. MNE groups can designate a surrogate parent entity to file on behalf of the ultimate parent.
85. Can the Country-by-Country information be used to issue a transfer pricing assessment?
No. The information included 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. The information in the country-by-country report on its own does not constitute conclusive evidence that transfer prices are or are not appropriate. Specifically, the information should not be used by tax administrations to propose adjustments based on an income allocation formula.
86. What happens if a country breaches its obligation to keep the information confidential?
When appropriate safeguards are not in place or when there has been a breach in keeping the information confidential and the situation has not been appropriately resolved, information exchange partners may suspend the exchange of information and therefore deny the exchange of CbC information.
87. When will these documentation requirements enter into force?
Effective implementation requires domestic law changes in many countries to align existing TP documentation requirement to the content and filing mechanisms agreed in the context of the BEPS Project. The report recommends that the first country-by-country reports be required to be filed for MNE fiscal years beginning on or after 1 January 2016. However, it also acknowledges that some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law.
88. Will the implementation of these documentation requirements be monitored?
Mechanisms will be developed to monitor jurisdictions’ compliance with their commitments and to monitor the effectiveness of the filing and dissemination mechanisms. The outcomes of this monitoring will be taken into consideration in thorough review planned for 2020, which will also reassess whether modifications are required to the content of the reports.