Transfer Pricing ‘Master File’ Must Bow to Countries’ Rules

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

Kevin A. Bell

The OECD’s recommendation that multinational companies submit a consistent “master file” of transfer pricing documentation to the various nations where they do business is being undermined by individual countries’ rules, practitioners told Bloomberg BNA.

The Organization for Economic Cooperation and Development guidance described the master file as a unified overview of each group’s intercompany transactions as they relate to the group’s significant businesses, transfer pricing policies and the sources of “value creation” within the group. The master file is one of the three elements of the OECD’s recommendations for transfer pricing documentation, along with the country-by-country report, which lists revenue, profits, taxes paid and specific measures of economic activity in each country of operation, and a “local file” that includes more specific information pertaining to a particular jurisdiction.

The documentation recommendations were the most widely adopted guidance from the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS), it’s two-year project to rewrite the global tax rules to curb aggressive tax planning by multinational companies. Most of the final BEPS recommendations were issued in October 2015.

Additional Requirements

As implied by the term, the master file was intended to be a single document that could be submitted to all countries within a taxpayer’s supply chain. However, many countries have chosen to require appendices to the master file, which means multinationals now faces the daunting task of preparing individualized information for each country in which they operate.

For example, China’s State Administration of Taxation has adopted a “special items” file for value chain reporting. A company must describe the physical flow of goods and cash within the group, as well as allocation principles used and the actual results of group profit allocations among the members of the global value chain.

Mexico, for its part, has issued proposed master file regulations requiring more details than the OECD guidance, including an in-depth description of a company’s business activities and more information on companies’ trademarks and other intangibles.

“To the extent that countries ask for additional information for the master file, that will certainly complicate life for multinational groups,” said John Warner, a shareholder of Buchanan Ingersoll & Rooney PC in Washington.

The OECD contemplated that most country-specific tailoring of information would be accomplished through the local file, Warner told Bloomberg BNA Feb. 24. Even there, he said, the hope was “to standardize information requests to some extent.” But “having said that, it was inevitable that each country would adapt any ‘standard’ transfer pricing documentation requirements to fit its own system,” Warner added.

Carol Doran Klein, vice president and international tax counsel at the United States Council for International Business, agreed that some expansion of the requirements was expected. “I think business was always concerned that countries would treat BEPS provisions—in particular the reporting requirements—as a starting point.”

Master File

The OECD guidance on the master file makes up just two pages in the 70-page final report on transfer pricing documentation.

It includes written descriptions of “important drivers of business profit,” a “description of the supply chain” for the group’s five largest products and services—by turnover—as well as any other products and services comprising 5 percent or more of the group’s turnover, a “description of the main geographic markets” for those products and a “brief written functional analysis describing the principal contributions to value creation” by entities within the corporate group.

Also included in the master file requirements are information about intangibles developed and used by the taxpayer, as well as intercompany financial activities.

Value Creation

Warner said he could understand a government’s desire to gain an understanding of a group’s overall transfer pricing philosophy and its sources of value creation. “It appears that the place to request that type of information is the master file,” he said.

Specifically, he said, a country might custom tailor the master file documentation requirements “to get a sense of whether intragroup transactions that do not directly involve any local taxpayers might have an effect on the results of intragroup transactions that do involve such local group members.”

Warner gave the following example: Company C, tax resident in Country X, deals with its affiliate, Company B, resident in Country Y, relating to a product or service. The internal supply chain involves Company A which is not resident in Country X.

The tax authorities in Country X may want to look more closely at transactions between Company A and Company B—or the group’s concept of how Company A creates value—to make sure profits aren’t being shifted to Company A that should be taken into account in determining whether Company C is reporting arm’s-length results, Warner said. “This is especially the case where Company C’s reported transfer pricing results are based on one-sided methodologies,” such as the transactional net margin method or the comparable profits method.

Consistent Story

Taxpayers are beginning to spend considerable effort on preparing the master file, said Paul Schmidt, tax chair at Baker & Hostetler LLP. Unlike a traditional transfer pricing report, which is heavily data-driven, the master file affords taxpayers an opportunity to tell their story. “It is a narrative that puts the pieces of a taxpayer’s transfer pricing puzzle together in one place,” he said.

For that reason, taxpayers are well advised to construct the document with great precision and balance, Schmidt said. “I fully expect corporate tax directors to pay close attention to the ‘art’ of describing the functions and risks and their company’s overall transfer pricing policy and to scrutinize the master file both for what it says and doesn’t say.”

Schmidt said taxpayers need to be prepared for the fact that jurisdictions that aggressively audit transfer pricing, “such as India, will continue to push on transfer pricing and to examine all elements of the transfer pricing package—the master file, local file and country-by-country report—in great depth in search for corroboration to support their bias.”

Warner said the more disclosures and documentation tax administrations require, “the more that a prudent multinational group needs to ensure that its total documentation package"—that is, the master file, local file and country-by-country report—"describes in a consistent way a transfer pricing policy that leads to reported results that are arm’s-length.”

Walking a Tightrope

Some groups operate in jurisdictions that make allocations through the traditional transfer pricing approach that was in place before the OECD’s revised rules under the BEPS project—an analysis of a company’s functions, assets and risks—as well as in jurisdictions that put greater emphasis on a company’s activities and presence in a jurisdiction—the “boots on the ground” approach that BEPS has introduced, Warner said. The latter approach is likely to be favored by countries like India.

Warner said these groups will have to walk a tightrope in describing why their judgment on where value is created satisfies the requirements of each relevant jurisdiction. “That certainly is one reason that groups may have to channel their artistic side a bit more when preparing the master file, which will be part of the documentation that every relevant jurisdiction will see,” he said.

Establishing Substance

Another practitioner, Jeffrey S. Korenblatt of Reed Smith LLP in Washington said that going forward, it will be more important for a company to establish that it has real operations where it claims profits.

“Building up, validating, and proving substance will be the challenge of the next decade,” he said. This will be driven by new, more expansive transfer pricing concepts that are reflected in the OECD BEPS project, recent Treasury guidance and other unilateral guidance from other countries, as taxpayers try to defend themselves against a new lack of international coordination and the need to migrate from structures that are no longer viable.

The need for substance “will have an impact far beyond transfer pricing,” Korenblatt said. It will be relevant to applications of taxable nexus, provision of treaty benefits and applications of anti-abuse rules.


Some companies are worried about tax administrations leaking the master file and other transfer pricing filings, and thus their business strategies.

Schmidt said this may be something companies take into consideration in drafting their reports. They will have to strike the right balance between protecting trade secrets and ensuring that the reports satisfy the requirements to provide the information.

Warner, however, said he hasn’t “heard much about the likelihood of tax administrations leaking the master files.” Much of what is intended to go into the file is a bit high-level and technical, and probably has limited political significance, he said.

Korenblatt said companies are less concerned with leaks and more concerned with outright disclosure. This is a real issue even for the U.S. Treasury, he said. “And as various countries propose expansive disclosure—as France did at one point and may again—uncertainties rise.”

Warner said the bigger perceived risk is leaking—or making public as a matter of policy—the country-by-country reports and the gross data in them “that might contain the seeds for making politically charged comparisons of local taxpayers’ inputs and reported taxable income.”

U.S. Auditors

Companies also face the possibility that U.S. auditors may add a request for a master file to their first information documentation request (IDR) in transfer pricing audits.

“I think they will, assuming that it is resolved that this sort of document disclosure is allowable from a Treasury policy point of view,” said Korenblatt. If Treasury takes a stricter approach, then it may be harder for auditors to make a request when they know that other elements of the U.S. government are trying to limit disclosure.

It’s certainly possible that IRS examiners will request the master file from taxpayers that are part of multinational groups, Warner said, “but I don’t think that will generally be the case right away.”

U.S. Documentation

Warner pointed out that the IRS didn’t in any way take the lead on the transfer pricing documentation requirements at the OECD, and in fact appeared in many respects to be a reluctant participant. “Much of what is supposed to be in the master file should appear in any U.S. taxpayer’s transfer pricing documentation in any event.”

However, some examiners might request the master file just to compare the information in it to the taxpayer’s U.S. documentation—required under Section 6662 of the tax code—Warner said. “And it may be that, eventually, the IRS finds that having the master file should be standard operating procedure.”

Schmidt said he isn’t aware of guidelines in the U.S. for requesting the master file through IDRs.

“If a transfer pricing adjustment is being considered, however, it wouldn’t be surprising for an IRS agent to be very interested in seeing the master file,” he said.

To contact the reporter on this story: Kevin Bell in Washington at

To contact the editor responsible for this story: Molly Moses at

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