OECD Recommendations To Expand Transfer Pricing Documentation

Leon Harris


On February 6, the OECD announced that multinational groups with a turnover above EUR 750 million must start Country by Country reporting in their countries of residence in 2016. This simple procedural requirement is sending shock waves round the international business community.




The OECD is spearheading a concerted effort to help governments around the world collect more taxes. The OECD is doing so by issuing a series of recommendations for tightening up corporate and personal tax measures. Individual governments are then likely to enact and/or implement such measures. Israel joined OECD joined the OECD in 2010.


On the corporate side, the OECD has begun publishing an action plan against so called “Base Erosion Profit Shifting” (BEPS). In simple English, these proposals should enable onshore countries tax profits shifted offshore by multinational companies.


Transfer pricing refers to the pricing and other terms of transactions between related entities in an MNE group. Most world trade is conducted through MNEs. In principle, countries around the world require transfer pricing to be on market-related “arm’s length” terms. The OECD and individual governments, have published detailed rules in this regard. In Israel there are transfer pricing regulations pursuant to Section 85A of the Income Tax Ordinance, which are similar to both the OECD guidelines and the US regulations under Section 482 of the US Internal Revenue Code.


These rules invariably require MNEs to prepare transfer pricing studies demonstrating that their transfer pricing is on arm’s length terms. The local version may then be demanded by the local tax authority (in Israel – within 60 days).




On September 16, 2014, the OECD published recommendations, since endorsed by the G20, for lifting the lid on transfer pricing used for international tax planning by multinational enterprises (MNEs). Typically this involves shifting intangible assets and risks offshore.


Action Report 13 of the OECD will soon force MNEs to expose to local tax authorities not only local transfer pricing practices, but also their worldwide set-up. This will be done by upgrading the transfer pricing study contents and requirements.


The main highlight will be a new Country-By- Country (CbC) report which will be extremely revealing. Anyone doing international tax planning should take note. As mentioned, on February 6, 2015, the OECD announced that multinationals with a turnover above EUR 750 million must start CbC reporting in their countries of residence in 2016. Presumably that means reporting 2015 intercom pay transactions.

The objectives of the OECD action plan 13 on transfer pricing documentation are subtly weighted in favor of tax authorities, namely: (1) Ensure taxpayers give “appropriate” consideration to transfer pricing, (2) Provide tax administration’s with information necessary to conduct an informed transfer pricing risk assessment, and (3) to provide to tax administrations with useful information to employ in conducting an appropriately thorough audit of transfer pricing practices of entities subject to tax in their jurisdiction.

Three-Tiered Approach to Documentation

The OECD action plan specifies three new tiers of transfer pricing study documentation:

1) Master File,

(2) Local File,

(3) The CbC report.

We summarize these below.

The Master File:

The Master File should provide an overview of the MNE group’s global business operations, it’s overall transfer pricing policies and it’s global allocation of income and economic activity. It need not be exhaustive (e. g. not every patent of the MNE) but should not omit anything affecting the reliability of transfer pricing outcomes. Where line of business presentation is used, centralized group functions and transactions between business lines should be properly described.

The main elements of the Master File are:
– an organization structure chart;
– a description of the MNE’s top and any others amounting to more than 5% of group turnover;
– the MNE’s intangible assets;
– the MNE’s intercompany financial activities;
– the MNE’s financial statements and tax rulings.

The Local File:
The Local File be more detailed and focus on transfer pricing analysis relating to transactions between a local country affiliate and associated Enterprises in different countries. This includes:
– financial information on specific transactions;
– a comparability and functional analysis;
– selection and application of the most appropriate transfer pricing method;
– information on the local management structure,
– key competitors;
– local financial statements;
– material intercompany agreements;
– other detailed aspects.

The Country-By- Country (CbC) Report:

MNE’s will be required to submit to local tax administrations with a spreadsheet style annual template specifying country by country information regarding its constituent entities relating to:
– Their tax jurisdiction;
– Revenues – intercompany and with independent parties;
– Profit (loss) before income tax;
– Income tax paid (on cash basis);
– Income tax accrued (current year);
– Capital;
– Number of employees;
– Tangible assets other than cash and cash equivalents;
– Constituent entities listing: showing where resident, where incorporated if different,

– main business activity(ies);
– Some countries may also request details of related party interest, royalty and service fee payments, e.g. Argentina, Brazil, China, Columbia, India, Mexico, South Africa and Turkey.

The Result:

In short, the CbC report will show where the profits end up and whether they get taxed there seriously or not. Until now, tax administrations had a more blinkered view of what MNEs are up to,

Miscellaneous Rules:

The local file should be finalized no later than the due date for filing the annual tax return, master file by the ultimate parent company’s due date, the CbC report by one year after the end of the ultimate parent company’s fiscal year.


Annual updating would be needed.

Each country should set materiality thresholds and the language(s) accepted.


Will Multiple Taxation Ensue?

A major concern is of multiple taxation if each onshore tax administration uses the CbC report to immediately issue a tax assessment to bring more profits into its tax net. The OECD says, however, that the information in the CbC report should not be used as a substitute for a detailed transfer pricing analysis (Para. 25). It remains to be seen whether this will act as a brake on multiple assessments by different onshore countries in an uncoordinated fashion.  Many are skeptical.



The Israel Angle:

In Israel, a bill has been sent to the Knesset to enable the Israeli government to sign up to multilateral tax treaties. But the Israeli Tax Authority isn’t waiting, it already issues information requests based on the CbC.
To Sum Up:

Multinationals everywhere will soon come under the microscope. Offshore tax planning may soon be out.  In will be countries where good engineers generate value…. such as Israel with its preferred enterprise tax breaks.


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