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OECD updates transfer pricing documentation

April 2014

During their recent webcast on April 2nd last, OECD representatives discussed tentative decisions regarding proposed changes to Chapter V of the OECD transfer pricing guidelines on documentation.

The tentative decisions reached by Working Party No. 6 at its two-day meeting during the week of March 24 reflect a positive reaction to the numerous comment letters the OECD received in response to the discussion draft issued for comment on 30th January 2014. These tentative changes include reducing the scope of information to be included in the country-by-country template, the most controversial part of the proposed new documentation rules.

The head of the Transfer Pricing Unit of the Tax Treaties, Transfer Pricing and Financial Transactions Division within the OECD’s Centre for Tax Policy and Administration, discussed the following tentative agreements reached by Working Party No. 6:

  • The template will include the following information: revenue, earnings before taxes, cash tax paid, current tax accrual, capital, retained earnings, tangible assets, and number of full time equivalent employees.
  • The template will be prepared on an “aggregate” country basis, not a separate entity by separate entity basis. We interpret aggregate to mean a simple adding of the financial information of the entities within a country without eliminating intracountry transactions. However, further clarification is needed on this point.
  • Eliminated transactional reporting of interest, royalties, and service charges. This information will only be contained in the local file if relevant.
  • Eliminated the requirement to disclose the top 25 highest paid employees.
  • A complete list of entities and permanent establishments, with activity codes for each, will be required for each country.
  • The rules will provide flexibility on the source of financial information, provided the group uses a consistent approach from year to year. Working Party No. 6 responded to the numerous comments they received stating that companies needed flexibility in providing statutory or financial reporting information because of the wide variety of accounting systems employed by companies.
  • Separate the country-by-country template from the master file.
  • Provide additional clarification that the master file should be a high-level overview of the company, which will put the company’s intercompany transactions in the context of its overall business operations. Many companies were concerned that the list of information contemplated by the January 30 discussion draft could run hundreds of pages. Companies will have to wait for additional guidance to see if they agree that the master file is only a high-level overview.
  • Provide flexibility to prepare the master file on either a company-wide or line of business basis.

Working Party No. 6 is scheduled to meet again in May to finalise its recommendation to the Committee on Fiscal Affairs.  At that meeting, Working Party No. 6 will try to resolve outstanding questions regarding the process for filing and sharing the master file and country-by-country template. Many companies are concerned that the master file and the county-by-country template may contain confidential information that will likely require the highest level of protection from disclosure. Companies have suggested that this high level of protection may be obtained only by filing the master file and country-by-country template with a company’s home country, and making the home country responsible for sharing them with interested countries through government-to-government information exchange agreements. On the webcast, Andrus reassured companies by stating that the country-by-country template is only intended to provide information to governments and not to the general public.

Working Party No. 6 will also consider at the May meeting the language in which the master file and possibly the local file must be prepared, and the requirement for companies to translate the documents into local languages. The 30th January 2014 draft stated that the master file is to be prepared in English.

The OECD will hold a public consultation on the proposed documentation rules on the 17th May next. The early release of the tentative agreements is likely an effort on the part of the OECD to better focus the public consultation on the tentative decisions and outstanding issues.

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