Creating a Local File in Transfer Pricing Documentation

This article leads off the article: Essential Components of Transfer Pricing Documentation.

Transfer pricing documentation has become a critical compliance aspect for multinational and medium-sized enterprises. One of the key components of this documentation is the local file, which provides detailed information on the related party transactions of a specific entity within a particular country.

The transfer pricing local file is an essential part of the three-tiered approach to transfer pricing documentation recommended by the Organisation for Economic Co-operation and Development (OECD). It complements the master file, which provides an overview of the multinational group’s operations, and the country-by-country report, which outlines the group’s financial and economic activities across different jurisdictions.

Key Aspects of a Transfer Pricing Local File

1. Local Entity’s Organizational Structure

The local file should begin with a clear organizational structure of the local entity. This includes:

  • A chart illustrating the local entity’s legal and ownership structure.
  • Description of management structure and key personnel.

Example: A local manufacturing subsidiary in Germany might include a detailed chart showing its place within the larger MNE structure, including key managers and reporting lines.

2. Detailed Description of Local Business Activities

This section should provide a detailed description of the local entity’s business activities. It includes:

  • Functions performed by the local entity.
  • Assets used by the local entity.
  • Risks assumed by the local entity.
  • Overview of the industry and market conditions.

Example: A local subsidiary of a pharmaceutical company might describe its specific R&D activities, the assets it utilizes (e.g., laboratory equipment), and the risks it undertakes (e.g., clinical trial failures).

3. Information on Controlled Transactions

Detailing controlled transactions is crucial for transfer pricing documentation. This includes:

  • Description of material intercompany transactions.
  • Amounts involved in these transactions.
  • Counterparties involved in these transactions.
  • Transfer pricing methods applied.

Example: A local subsidiary might list its purchases of raw materials from the parent company, the amounts paid, and the transfer pricing method used to determine the transaction price.

4. Transfer Pricing Policies and Agreements

This section outlines the local entity’s transfer pricing policies and any relevant agreements. It should cover:

  • Copies of intercompany agreements.
  • Details of pricing policies for intercompany transactions.
  • Economic analysis supporting the pricing policies.

Example: A local subsidiary might provide copies of service agreements with the parent company, along with a description of the cost-plus method used to price these services.

5. Financial Information

The final section should present the local entity’s financial information, including:

  • Financial statements for the fiscal year.
  • Schedule of related party payments and receipts.
  • Any relevant financial information to support the transfer pricing analysis.

Example: A local subsidiary might include its annual financial statements and a detailed schedule of payments made to related parties for services rendered.

6. Understand the Local Guidelines

It is important to note that while the OECD guidelines provide a general framework, local tax authorities may have specific requirements or variations in their transfer pricing documentation rules. Therefore, it is crucial to consult the relevant local regulations and ensure compliance with the specific requirements of each jurisdiction.

Formatting and Presentation:

While there is no prescribed format for the local file, it is essential to present the information in a clear, organized, and easily accessible manner. Here are some best practices for formatting and presenting the local file:

  1. Use a logical structure: Organize the local file into sections and subsections, following a consistent and logical flow. This will make it easier for tax authorities to navigate and understand the information provided.
  2. Employ clear headings and subheadings: Utilize descriptive headings and subheadings to guide the reader through the different sections and topics covered in the local file.
  3. Incorporate visual aids: Consider including tables, charts, diagrams, and other visual aids to present complex information in a more accessible and understandable format.
  4. Provide cross-references: Where relevant, cross-reference information from other parts of the transfer pricing documentation, such as the master file or supporting documents, to avoid duplication and ensure consistency.
  5. Use consistent terminology: Maintain consistency in the use of terminology throughout the local file, aligning with the definitions and terminology used in the OECD guidelines and local regulations.
  6. Ensure proper indexing and pagination: Include a table of contents, proper indexing, and clear pagination to facilitate easy navigation and reference within the local file.

Compliance and Best Practices:

In addition to the content and formatting requirements, there are several best practices to consider when creating a local file for transfer pricing documentation:

  1. Contemporaneous documentation: Prepare the local file contemporaneously with the controlled transactions, ensuring that the information and analysis reflect the actual circumstances and decisions made at the time of the transactions.
  2. Regular updates: Review and update the local file annually or whenever there are significant changes in the business operations, transactions, or economic circumstances that may impact the transfer pricing analysis.
  3. Involve relevant stakeholders: Collaborate with various departments and stakeholders within the organization, such as finance, operations, and legal, to gather accurate and comprehensive information for the local file.
  4. Maintain supporting documentation: Retain and organize all relevant supporting documentation, such as contracts, agreements, financial data, and comparables analyses, to substantiate the information provided in the local file.
  5. Conduct risk assessments: Perform regular risk assessments to identify potential areas of non-compliance or exposure, and address them proactively in the local file.
  6. Seek professional advice: Consider consulting with transfer pricing experts, such as firms like TRM (, to ensure compliance with local regulations, provide guidance on best practices, and mitigate potential risks.

In Closing

Creating a comprehensive and compliant local file is a critical aspect of transfer pricing documentation for multinational organizations and medium-sized enterprises. By following best practices, such as adhering to the OECD guidelines, maintaining a logical structure, ensuring clear presentation, and involving relevant stakeholders, tax professionals can effectively communicate the arm’s length nature of their related party transactions to tax authorities.

However, transfer pricing regulations can be complex and vary across jurisdictions. Consulting with experienced transfer pricing professionals can provide valuable guidance and expertise to navigate the intricacies of local requirements, mitigate risks, and ensure compliance with the ever-evolving transfer pricing landscape.


  1. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (
  2. Aibidia, “Transfer Pricing Documentation Localization Guide” (
  3. Valentiam Group, “Transfer Pricing Documentation: 5 Best Practices To Follow” (
  4. Deloitte, “Transfer pricing documentation and country-by-country reporting” (
  5. Aibidia, “How to Prepare a Local File in 60 Minutes” (
  6. Quantera Global, “Transfer pricing local file” (
  7. Baker McKenzie, “Template_Local File Transfer Pricing” (
  8. OECD, “Draft Toolkit on Transfer Pricing Documentation” (
  9. PwC, “The requirements for the Local file and the information to be contained therein” (
  10. Kluwer International Tax Blog, “Transfer Pricing Documentation: What a Local File Could Look Like” (
  11. TaxCoach, “Transactions with related entities – transfer prices” (
  12. EY, “How is technology transforming transfer pricing benefits documentation” (
  13. PwC, “Transfer Pricing Consulting” (

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