Tax AdvisoryApril 26, 2022by fieconOECD Transfer Pricing Guidance On Documentation


In January 2022 the OECD (Organization for Economic Co-operation and Development) released a final version of the transfer pricing guidance on documentation and other important sections pertaining to transfer pricing.

As per OECD 2022 guidance on documentation, it provides guidance for tax administrations to take into account in developing rules and/or procedures on documentation to be obtained from taxpayers in connection with a transfer pricing enquiry or risk assessment. It also provides guidance to assist taxpayers in identifying documentation that would be most helpful in showing that their transactions satisfy the arm’s length principle and hence in resolving transfer pricing issues and facilitating tax examinations.

The 2022 guidelines stipulate that jurisdictions should adopt a standardized approach to transfer pricing documentation for reporting purposes, which include:

  • Master File containing standard information relevant for all MNE (Multi National Enterprise) group members including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. In general, the master file is intended to provide a high-level overview in order to place the MNE group’s transfer pricing practices in their global economic, legal, financial and tax context. The master file should include the following information:
    • Organizational Structure illustrating the MNE’s group’s legal and ownership structure and geographical location of operating entities.
    • Description of MNE’s group’s businesses including but not limited to drivers of business growth, supply chain description and service arrangements other than research and development, description of main geographical markets, brief written functional and risk analysis and description of important business restructuring transactions, acquisitions and divestitures among others.
    • MNE group’s Intangibles including but not limited to MNE’s group overall strategy for DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation) of intangibles.
    • MNE’s group’s intercompany financial activities including but not limited to description on how MNE group is financed, identification of any members of the MNE group that provides central financing function and description of MNE’s group general transfer pricing policies.
    • MNE’s group’s financial and tax position including group’s annual consolidated financial statement for the fiscal year concerned and a list of and brief of the MNE group’s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among jurisdictions.
  • Local file referring specifically to material transactions of the local tax payer. 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 affiliate and associated enterprises in different jurisdictions and which are material in the context.

The following information is deemed to be included in the local file:

    • Local entity management structure, organizational chart and description of the individuals to whom local management reports and jurisdiction.
    • Controlled transactions: OECD guidelines provides that material category of controlled transactions should include the following information but not limited to; description of controlled transactions and the context in which such transactions take place.
    • Financial information includes but not limited to; annual local entity financial accounts for the fiscal year concerned, information and allocation schedules and summary schedules of relevant financial data.
  • A country-by-Country (cbc) Report containing certain information relating to the global allocation of the MNE (Multi National Enterprise) group’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group. 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.

The report should include the following information:

    • Allocation of income, taxes and business activities by tax jurisdiction
    • List of all the constituent entities of the MNE group included in each aggregation per tax jurisdiction
    • Any additional information deemed important.

However review of country-by-country information report should be exercised with caution; in that the information should not be used as a substitute for a detailed transfer pricing analysis of individual transactions and prices based on a fully functional analysis and a full comparability analysis. The argument here is that the information in the country-by-country report on its own does not constitute conclusive evidence and that it should not be used by tax administrations to propose transfer pricing adjustments based on a global formulary apportionment.

In closing, this updated approach to transfer pricing documentation should provide tax administrations with relevant and reliable information to perform an efficient and robust transfer pricing risk assessment analysis. It will also provide a platform on which the information necessary for an audit can be developed and provide taxpayers with a means and an incentive to meaningfully consider and describe their compliance with the arm’s length principle in material transactions.

Author: Eddie opiyo