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Tuesday, 19 April 2016

The future of transfer pricing documentation

The T/A economics team headed by A. Neuteleers

The OECD’s transfer pricing documentation requirements significantly change the equilibrium of ‘business as usual’ even for MNEs  (multinational enterprises) that have already compiled documentation in the past. Furthermore, the new, three-tiered approach - Master File, Local File, Country-by-Country Report - will not only provide tax administrations with more detailed information regarding the global value chain of a company, but may bring to the surface inconsistencies in both TP policies and their implementation. This article outlines these new obligations and how companies should be preparing to comply with them.

A first significant (and obvious) change relates to large MNEs (above EUR 750m consolidated revenues) being required to file a Country-by-Country Report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued, as well as the number of employees, stated capital, retained earnings and tangible assets. Plenty of focus from various market players has already gone into this subject matter. What in our view remains underestimated at this stage, are the significant changes the OECD Master File/Local File approach brings compared to what in the recent past has been considered proper transfer pricing documentation – often also following a Master File/Local File approach (yet free of form).

The Master File requires a deeper level of reporting, with possible requirements to declare more sensitive data. The information required in the Master File provides a “blueprint” of the MNE group and contains relevant information that can be grouped in five categories: a) the MNE group’s organisational structure; b) a description of the MNE’s business; c) the MNE’s intangibles; d) the MNE’s intercompany financial activities; and e) the MNE’s financial and tax positions. Whereas the Master File’s general purpose  Fmay be the same as thought before, the specific content required significantly goes further than past best practice (e.g. intercompany financing).

Also, there has been a clear shift in focus from the legal form to the economic reality of a transaction. In cases where the economically relevant characteristics of a transaction are inconsistent with the contractual terms, the actual transaction should be identified based on the actual conduct of parties. In combination with the emphasis on value creation, this shift in focus requires a thorough, two-sided analysis to determine which party to the transaction is entitled to the profits. Therefore, in our view, the October 2015 revision of the assessment framework in Chapter I of the OECD Transfer Pricing Guidelines requires increased economic ‘storytelling’ capabilities, and a review of the assessment framework regarding, for instance, risk and capital.

The information required in the Local File supplements the Master File and helps to meet the objective of ensuring that the taxpayer has complied with the ‘arm’s length principle’ in its material transfer pricing positions affecting a specific jurisdiction. Such information would include relevant financial information regarding those specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method. Attention should be paid to the increased level of the transactional details required, and how the financial data used in applying the TP method may be reconciled to the annual financial statements. In addition, the Local File needs to be consistent with both the Master File and (when required) the Country-by-Country Report. Furthermore, searches for comparables must be updated every three years, and financial data on the comparables must be updated annually.

In our view, this approach to transfer pricing documentation will provide tax administrations with relevant and reliable information to perform an efficient and robust transfer pricing risk analysis. It will also provide a platform on which the information necessary for an audit can be developed and provide taxpayers with the means and incentive to meaningfully consider and describe their compliance with the ‘arm’s length principle’ in material transactions. For companies, the assessment should start with the identification of the specific transactions and countries that may be affected by BEPS, the data collection process, and the re-assessment of to what degree they comply with the transfer pricing legislation of the jurisdictions in which they operate.

Status Belgium

In a policy note of December 2015, the Minister of Finance stated that Belgium will adopt the OECD’s recommendations. Although the current draft legislation is still subject to further debate, from certain sources it is understood that the content of the documentation requirements will closely, but not exactly, adhere to the OECD guidance detailed above. For instance, according to certain officials, consideration is also being given to letting (certain) taxpayers file additional data separately, potentially together with the tax return filing, that will enable the Belgian tax authorities to perform a more thorough risk assessment than purely on the basis of the general tax return and financial report filings. There also seems not to be any consensus currently on the materiality thresholds that apply for introducing a Master File/Local File documentation requirement.

In spite of the ongoing internal debate, it is expected, however, that the final proposals will be made (public) soon… We will report on the impact of such new Belgian legislation as soon as it happens.

For more information, please contact:
The T/A economics* team headed by Andy Neuteleers - T/A economics partner (

*T/A economics is an independent economist boutique specialized in transfer pricing and valuations, that has entered into a network arrangement with Tiberghien. The views expressed in the above article remain that of T/a economics and its authors.

The T/A economics team headed by A. Neuteleers

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