Creating a Master File for Transfer Pricing Documentation

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

Multinational enterprises (MNEs) and medium-sized businesses with cross-border transactions must maintain robust transfer pricing documentation to demonstrate compliance with the arm’s length principle. A key component of this documentation is the transfer pricing master file, which provides a high-level overview of the organization’s global business operations, transfer pricing policies and financial information. This comprehensive guide will explore the best practices for creating a practical transfer pricing master file that meets regulatory requirements and mitigates potential risks.

Understanding the Transfer Pricing Master File

The transfer pricing master file is a crucial element of the three-tiered approach to transfer pricing documentation recommended by the Organisation for Economic Co-operation and Development (OECD). It is a centralised document outlining the multinational group’s organizational structure, business activities, intangible assets, financing arrangements, and financial and tax positions.

The primary objectives of the transfer pricing master file are:

  1. Transparency: Tax authorities should clearly understand the MNE group’s global operations, value chain, and transfer pricing policies.
  2. Consistency: Ensure consistency in applying transfer pricing policies across different jurisdictions.
  3. Risk Management: Identify potential transfer pricing risks and facilitate risk assessment by tax authorities.

Best Practices for Creating a Transfer Pricing Master File

Creating a comprehensive and compliant transfer pricing master file requires careful planning, data gathering, and analysis. Here are some best practices to follow:

1. Understand Local Requirements

While the OECD guidelines provide a general framework for the transfer pricing master file, it is essential to understand and comply with the specific requirements of the jurisdictions in which your organization operates. Different countries may have varying expectations regarding the level of detail, language, and submission deadlines for the master file.

2. Establish a Centralized Process

Developing a centralized process for collecting and consolidating information from various entities within the MNE group is crucial. This process should involve collaboration between the tax department, finance team, and relevant business units to ensure accurate and consistent data collection.

3. Maintain Organizational Structure and Ownership Details

The transfer pricing master file should provide a clear overview of the MNE group’s legal and operational structure, including details of legal entities, ownership percentages, and geographical locations. This information should be regularly updated to reflect any changes in the group’s structure, such as mergers, acquisitions, or divestitures.

This includes:

  • A chart illustrating the legal and ownership structure.
  • Geographic locations of operating entities.

Example: A global technology company might include a detailed chart showing its parent company in the U.S., subsidiaries in Europe, Asia, and Latin America, and the ownership percentages of each entity.

4. Describe Business Activities and Value Chain

The master file should include a detailed description of the MNE group’s business activities, including its principal products and services, supply chain, and key geographic markets. This section should also highlight any significant business restructurings, transfers of intangible assets, or changes in business strategies that may impact transfer pricing.

This section should provide a general description of the MNE’s business activities. It includes:

  • Important drivers of business profit.
  • Description of the supply chain for the group’s largest products/services.
  • Main geographic markets for these products/services.
  • Functional analysis describing key contributions to value creation by individual entities.

Example: A pharmaceutical company might describe its R&D operations in Switzerland, manufacturing in India, and marketing and sales functions distributed globally.

5. Document Intangible Assets

Intangible assets, such as patents, trademarks, and trade names, are crucial in transfer pricing analysis. The master file should provide a comprehensive overview of the MNE group’s intangible assets, including their ownership, development, and exploitation within the group.

Detailing the intangibles is crucial for transfer pricing documentation. This includes:

  • Strategy for development, ownership, and exploitation of intangibles.
  • List of important intangibles and their ownership.
  • Agreements related to intangibles, such as licensing and cost contribution arrangements.

Example: A software company might list its patents, licenses, and development agreements across various jurisdictions.

6. Outline Financing Arrangements

The transfer pricing master file should describe the MNE group’s financing arrangements, including details of intercompany loans, guarantees, and cash pooling arrangements. This information is essential for understanding the group’s financial structure and potential transfer pricing implications.

This section outlines the financial interactions within the MNE. It should cover:

  • Financing arrangements within the group.
  • Identification of entities providing central financing functions.
  • Transfer pricing policies related to financing.

Example: A retail company might describe how its European subsidiary provides central financing for other entities and the policies governing these transactions.

7. Include Financial and Tax Information

The master file should include consolidated financial statements for the MNE group, as well as an overview of the group’s effective tax rates and tax positions in different jurisdictions. This information provides context for understanding the group’s transfer pricing policies and potential tax risks.

Thi section should present the MNE’s financial and tax positions, including:

  • General transfer pricing policies.
  • Annual consolidated financial statements.
  • Existing unilateral advance pricing agreements (APAs) and tax rulings.

Example: An automotive manufacturer might include its global consolidated financial statements and details of any APAs with tax authorities in major markets.

8. Maintain Consistency with Local Files

Ensuring consistency between the transfer pricing master file and the local files prepared for individual entities is crucial. The master file should align with the information provided in the local files, and any discrepancies should be addressed and explained.

9. Regularly Update and Review

The transfer pricing master file should be regularly updated to reflect changes in the MNE group’s operations, financial position, and transfer pricing policies. Periodic reviews should be conducted to ensure the accuracy and completeness of the information provided in the master file.

10. Seek Professional Assistance

Other Considerations for Preparing a Transfer Pricing Master File

1. Consistency and Accuracy

Ensure that the information in the master file is consistent with local files and other financial documentation to avoid discrepancies that could trigger audits.

2. Timeliness

Prepare and update the master file annually, aligning it with the fiscal year to ensure it is available when required by tax authorities.

3. Compliance with Local Regulations

While the OECD guidelines provide a framework, the specific documentation requirements of the countries in which the MNE operates should always be considered.

4. Clear and Concise Documentation

While there is no prescribed format for the master 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.

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.

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.

Provide clear, concise, and well-organized information to facilitate tax authorities’ understanding and minimize the risk of inquiries and audits.

5. Seek Professional Assistance

Given the complexity of transfer pricing regulations and the potential risks associated with non-compliance, it is advisable to seek professional assistance from experienced transfer pricing advisors. Firms like Tax Risk Management (TRM) (www.taxriskmanagement.com) have experts who can guide and support in creating a robust transfer pricing master file that meets all regulatory requirements.

Final Thoughts

Creating a comprehensive and compliant transfer pricing master file is a critical task for multinational enterprises and medium-sized businesses engaged in cross-border transactions. By following the best practices outlined in this guide, organizations can ensure transparency, consistency, and effective risk management in their transfer pricing documentation. Additionally, seeking professional assistance from experienced firms like TRM can provide valuable insights and expertise to navigate the complexities of transfer pricing regulations and mitigate potential risks.


References: 
OECD (2017), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017, OECD Publishing, Paris. https://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm 
OECD (2015), Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://www.oecd.org/tax/transfer-pricing-documentation-and-country-by-country-reporting-action-13-2015-final-report-9789264241480-en.htm 
PwC, “Transfer Pricing Master File Template,” https://www.pwc.de/en/steuern/transfer-pricing.html 
EY, “Worldwide Transfer Pricing Reference Guide 2022-23,” https://www.ey.com/en_gl/tax-guides/worldwide-transfer-pricing-reference-guide 
KPMG, “Transfer Pricing Services,” https://home.kpmg/ch/en/services/tax/transfer-pricing-services.html Valentiam Group, “Transfer Pricing Documentation: 5 Best Practices To Follow,” https://www.valentiam.com/newsandinsights/transfer-pricing-documentation 
Quantera Global, “Transfer pricing master file,” https://www.quanteraglobal.com/services/transfer-pricing-master-file/

Related Articles