Implementing changes to transfer pricing documentation arising from BEPS actions.

Tax Alert - February 2016

By Anu Chavali and Bart de Gouw


Following the November 2015 release of the various BEPS Actions, taxpayers are starting to turn to their implementation. Transfer pricing documentation is an area where the requirements are now settled, and implementation work should commence for all taxpayers with cross border related party transactions.

Recap on the changes to transfer pricing documentation

The revised Chapter V of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations contains new standards for transfer pricing documentation. The guidelines recommend that jurisdictions adopt a three-tiered approach to transfer pricing documentation:

  • A master file with global information about a multinational corporation group, including specific information on intangibles and financial activities that is to be made available to all relevant country tax administrations;
  •  A local file with detailed information on all relevant material intercompany transactions of the particular group entity in each country; and
  • A country-by-country (CbC) report of income, earnings, taxes paid, and certain measures of economic activity. This is applicable to companies with revenue in excess of 750 million Euros, or approximately 1,200 million New Zealand Dollars.

The transfer pricing guidelines have also been expanded in the area of how risks are dealt with. Risk allocation is a common issue, and one where taxpayers can act now by reviewing and updating the transfer pricing documentation and the relevant intercompany agreements.

Implications of greater information and transparency

Tax authorities have not had access to master file information in the past except in the cases where it had a direct impact on a local entity’s activities. Therefore, an increase in global transparency may result in tax authorities focusing on broader aspects and structure. For example, the additional information could result in inquiries about the development of intangibles by one group member, funding or ownership of the intangibles by another group member, and their exploitation by another group member.

Interestingly, with the increased scrutiny resulting from BEPS, we have already seen a broadening of questions that tax authorities are asking of Multinational Enterprises (MNEs) under review or audit including expanded functional analyses which describe the contributions to value creation by individual entities in a group and questioning of how risks are managed and controlled.

Process for preparing the information

The new guidance will change the documentation process fundamentally and increase the transfer pricing compliance burden for MNEs in New Zealand. Most MNEs will have to gather and provide to the tax authorities substantially more information on their global operations than in previous years.  From a New Zealand point of view, the master file and local file requirements have a broader application, while the requirements for the CbC report will apply to only a limited number of MNEs headquartered in New Zealand. Inland Revenue has directly contacted those New Zealand headquartered groups which will be subject to CbC reporting guidelines going forward.  

The CbC report and the master file will most likely be prepared and maintained by the MNE’s head office as they will have access to all of the required information. It is expected that the new guidance will pose a substantial change for MNEs that do not currently prepare their documentation on a global basis.

Going forward, MNEs will have to ensure that their master file, local file, and CbC report all provide consistent information about the company’s global operations and transfer pricing policies. For MNEs that took a decentralised approach to transfer pricing documentation, the additional preparation or coordination requirements will likely necessitate the allocation of additional resources.

It should be noted that the updated requirements will require more than just a straightforward rollover of the previous year’s transfer pricing documentation. Therefore, each MNE needs to determine the appropriate level of compliance with the revised transfer pricing documentation requirements. A risk based approach will need to be adopted to balance the MNE’s tolerance for risk and its available resources.

In particular, tax executives will need to identify the impact of the revised guidance on their processes, measure the impact, prioritise the actions needed, develop an approach to centralise control over transfer pricing, communicate with key stakeholders, and develop restructuring options, if necessary. A prudent action is to meet with your tax advisor to begin the process for the preparation of the master file, the local file, and the CbC report (if applicable) for the most recent year to identify gaps, and to begin to make decisions about what information will be included in each report.

The new requirements for master file and local documentation are relatively prescriptive and will require MNEs to collect a considerable amount of information that has not been collected by either the headquarters or the group members in the past.  Furthermore, the new information required will likely necessitate new processes to obtain, collect, validate, analyse, and refresh data.

Master File Requirements

The Master File should contain the following information:

  • The MNE’s organisational structure
  • A description of the MNE’s business or businesses
  • Intangibles
  • Intercompany financial activities
  • Financial and tax positions

MNEs could present the information for the group as a whole, or by line of business, as long as centralised group functions and transactions between business lines are properly described. In addition, if the master file is prepared by line of business, all product groups will have to be submitted to tax authorities, even if the local entity is part of only one line of business.

The new requirements include the following:

  • A supply chain chart for the five largest products and service offerings, plus other products or services amounting to more than 5 percent of an MNE’s sales;
  • A list and brief description of important service arrangements between members of the MNE group, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intragroup services;
  • A description of the main geographic markets for the group’s products and services that are referred to in the bullet point immediately above;
  • A brief written functional analysis describing the principal contributions to value creation by individual entities within the group, such as key functions performed, important risks assumed, and assets used;
  • A description of important business restructuring transactions, acquisitions, and divestitures occurring during the fiscal year;
  • Important intangibles or groups of intangibles and which entities own them;
  • A general description of how the group is financed, including important financing arrangements with unrelated lenders;
  • The MNE’s annual consolidated financial statement for the fiscal year in question, if otherwise prepared for financial reporting, regulatory, internal management, tax, or other purposes; and 
  • Advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries.

Most companies in New Zealand will not have had to prepare a master file in the past. Therefore, this is expected to be a substantial change for most MNEs in New Zealand in future.

Local File Requirements

The revised guidance requires that the local file contain much of the same information that was traditionally found in transfer pricing documentation related to the local entity, including its controlled transactions, and financial data. While the master file provides a high level overview, the local file should provide more detailed information relating to specific material intercompany transactions.

One of the major concerns for MNEs may be the varying thresholds of what constitutes a material transaction that must be documented. Some countries require that all transactions be documented, whereas other countries are more concerned with major transactions that have a significant impact on the local entity’s tax liability. The guidelines recommend that individual country transfer pricing documentation requirements include specific materiality thresholds.

For more information please contact one of our transfer pricing specialists.

Tax Alert February 2016 Contents:

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