As a result of the report released in February 2013, Addressing Base Erosion and Profit Shifting, OECD and G20 countries adopted a 15-point Action Plan. The Action Plan aims to address Base Erosion and Profit Shifting (BEPS) matters and define instruments that will ensure that taxation right of specific countries is exercised in accordance where economic activities take place and value is created. After two years of work, the 15 actions have been completed.
Final report regarding Action point 13 has been published in 2015. The report revises OECD standards for transfer pricing documentation and defines a three-tiered transfer pricing documentation. Please find below most important changes about transfer pricing documentation.
1.1. Types of transfer pricing documentation files
Masterfile – a document based on which Multinational Enterprises (MNEs) should provide to their tax administrations general information on their business activity and transfer pricing policy applied within the MNE group;
Local file – adocument that is complementary to Masterfile at the level of each country and includes detailed information about local entities, data on related party transactions and transfer pricing analysis of such transactions;
Country-by-Country (CbC) Report – a document that certain MNEs should prepare, covering each tax jurisdiction in which they operate. CbC Report contains information about global allocation of revenues between members of the MNE group, taxes paid, number of employees, value of assets, equity and retained earnings, per each jurisdiction in which the MNE group operates.
The purpose of preparing the three-tiered documentation is to ensure implementation of a consistent transfer pricing policy at the level of an entire MNE group.
1.2. To whom it applies?
Masterfile and Local transfer pricing documentation file should be prepared and submitted by all taxpayers directly to their tax administrations. All members within a MNE group with minimum annual consolidated group revenue in the previous year of EUR 750 million are obligated to prepare CbC Report. However, CbC Report is to be submitted only by the ultimate parent of a MNE group to their own tax administration, while data reported in such submitted CbC Report shall be automatically exchanged between different tax jurisdictions i.e. tax administrations.
1.3. Timeframe
Changes provided in Action point 13 should be implemented for all fiscal years starting from 1 January 2016, as follows:
CbC Report should be filled within 12 months from the end of a fiscal year for which it is prepared, with recommendation that first CbC Report should be filled by 31 December 2017. In case a MNE group operates in a fiscal year that differs from a calendar year, recommendation is that CbC Report should be filled within 12 months from the end of the relevant fiscal year;
Deadline for submitting Masterfile and Local file is not precisely defined and it depends on local legislation. Best practice requires that Local file should be finalised no later than the deadline for submitting tax return for the fiscal year in question. Masterfile should be reviewed and updated, if necessary, by the deadline for submitting tax return of the ultimate parent company of the MNE group. These files are to be submitted directly to tax administrations together with tax returns or upon request of tax administrations.
1.4. Frequency of transfer pricing documentation update
Masterfile, Local file and CbC Report should be reviewed and updated annually.
For the purpose of simplicity, some tax jurisdictions may determine in their local legislation that the comparable search in available databases is to be carried out every three years, instead of each year, but only providing the business activity conditions remained unchanged. However, financial data of the comparable companies for the purpose of benchmarking analysis should be updated once a year in order to support the arm’s length character of the analysed transaction.