OECD’s latest discussion draft on transfer pricing documentation and country-by-country reporting

Following the release of the OECD’s BEPS Action Plan in July 2013, the OECD on 30 January 2014 issued for comment a revised discussion draft of Chapter V of the OECD transfer pricing guidelines (the revised draft).

This paper is focused on transfer pricing documentation requirements and country-by-country reporting. Australian taxpayers’ key takeaways from the revised draft are set out below.

Objective and impact

The objective of the revised Chapter V is to streamline and encourage consistency in OECD member countries’ transfer pricing documentation rules, while also providing tax authorities with more focused and useful information for consideration in connection with transfer pricing risk assessment activities and audits.

This objective contains an intention for the revision to benefit both tax administrations and businesses. However, the concern is that the revised Chapter V will provide clear benefits to tax authorities (i.e. giving them additional, useful information), but offer little in the way of benefits to taxpayers. Instead, the revised guidelines – as currently drafted – are likely to result in significantly increased reporting obligations and compliance burdens for multinational enterprises (MNEs).

Impact on Australian multinationals

The revised guidelines are relevant for Australian MNEs, as the ATO is likely to incorporate the OECD’s guidance in its new Taxation Ruling on transfer pricing documentation, which is due to be released later this year. If the ATO does follow the OECD’s lead:

  • Australian headquartered MNEs will need to consider their level of compliance with the OECD/ATO’s documentation requirements and the likely adverse consequences if the requirements are not met. It is not yet clear whether less than total compliance will mean that the MNE cannot have Reasonably Arguable Positions (RAPs) for their transfer pricing positions. However, transfer pricing documentation that satisfies the ATO’s “four step process” (as set out in Taxation Ruling 98/11) is unlikely to satisfy the OECD’s proposed new transfer pricing record keeping requirements
  • Australian inbound MNEs will also be affected, with specific information being required for inclusion in local transfer pricing files and access being required to their MNE group’s master file (see further below). In addition, the revised draft’s preference for the use of local comparables over regional comparables means that some Australian inbound MNEs will have to rethink the reliability of their existing benchmarking analyses.

Proposed two-tier structure for transfer pricing documentation

The revised draft requires a two-tier structure for MNEs’ transfer pricing documentation, consisting of:

  1. A Master File containing standardised information for all MNE group members and completed in English. The Master File is intended to provide a complete picture of the MNE group’s global business, financial reporting, debt structure, tax situation and the allocation of the MNE’s income, economic activity and tax payments. Relevant information is grouped into five categories; namely, the MNE group’s: (a) organisational structure; (b) business or businesses; (c) intangibles; (d) intercompany financial activities; and (e) financial and tax positions.

    Annexure I to the revised Chapter V details information to be included in the Master File across the above categories. While some of this information is included in MNEs’ current transfer pricing records, the discussion draft also requires some new items that would not generally be included (and to which tax managers may not have access), such as a list of the MNE’s APAs and the title and country of the principal office of each of the 25 most highly compensated employees in the business line.

    As part of the Master File, Annex III to Chapter V requires completion of a country-by-country template, containing information such as revenue, EBIT, income and withholding taxes paid, capital and accumulated earnings, number of employees, employee expenses, tangible assets, and royalties, interest and service fees paid to/from constituent entities.
  2. A Local File supplementing the Master File and helping to demonstrate the local taxpayer’s compliance with the arm’s length principle in respect of its material transfer pricing positions.

Annexure II to Chapter V details information to be included in the Local File. This includes such things as descriptions and quanta of the taxpayer’s controlled transactions, functional analyses, selection and application of the most appropriate transfer pricing method(s), and conclusions about whether the relevant transactions were conducted on an arm’s length basis.

Having regard to the extent of material required in the Master and Local Files, a real question arises as to whether the proposed two-tiered approach to transfer pricing documentation achieves the OECD’s goal of making transfer pricing compliance more consistent and straightforward. No doubt taxpayers and their advisers will make submissions to the OECD on this point and suggest alternatives.


The revised draft advocates as best practice the preparation of both the Master and Local Files no later than the due date for filing of the tax return for the relevant period.


The revised draft recommends that transfer pricing documentation requirements include specific materiality thresholds that take into account the size and nature of the local economy, the importance of the MNE group in that economy, and the size and nature of local operating entities, in addition to the overall size and nature of the MNE group.

In an Australian context, this part of the revised draft has to be read in light of our new transfer pricing documentation rules (in subdivision 284-E of the Taxation Administration Act 1953), which contain no specific transfer pricing materiality thresholds for taxpayers wanting to have RAPs for their transfer pricing positions.

It is to be hoped that the forthcoming ATO Taxation Ruling on transfer pricing documentation will include comments on materiality, so compliance burdens are not imposed on Australian taxpayers that are disproportionate to the level of tax risk concerned.


The discussion draft notes that the requirement to use the most reliable information in transfer pricing analyses will necessitate the use of local comparables over regional comparables, where local comparables are reasonably available. Added to the ATO’s practical preference for the use of Australian comparable data, this comment in the revised guidelines has clear, adverse implications for Australian taxpayers that currently rely on overseas comparable data.

Periodic updates

The revised guidelines recommend that taxpayers review and update their Master and Local Files annually. For comparability studies, where business descriptions, functional analyses and comparables do not change materially, updates to financial data for the comparables are recommended annually, while fresh searches for comparables are recommended only every three years.

Next steps

If approved, the text of Chapter V of the OECD’s transfer pricing guidelines would be deleted and replaced with the proposed new language and annexures. Before that happens, the OECD has requested comments on the revised draft (including responses to specific questions listed throughout) by 23 February 2014. The OECD has also committed to considering whether information relevant to other aspects of the BEPS Action Plan should be included in MNEs’ transfer pricing documentation packages.

Interested parties should provide feedback to the OECD on this latest draft of Chapter V in order to protect their positions. They should also consider the draft guidelines’ potential impact on their existing transfer pricing record-keeping systems and report contents, and design an appropriate course of action for if and when the documentation guidelines are finalised.

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