OECD Aligning Transfer PricingOECD Aligning Transfer Pricing

In December of 2015, the US issued proposed regulations related to the implementation of OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, Action 8-10 – Aligning Transfer Pricing Outcomes with Value Creation. (Have we lost you yet?) These proposed regulations would require US Multi-National Enterprises (MNEs) with annual revenues of $850 million (Now have you checked out?) to report, on a country by country (CbC) basis, detailed information on its business activities, revenues, profits, taxes, capital, assets, and employees.

Reporting will be required in the year following the year the regulations are finalized. Meaning, not this fiscal year, but next, at the earliest. (By now, surely you have stopped reading.) Finally, the US tax authorities have indicated that they will not require companies to comply with BEPS Master File and Local File reporting as they believe existing tax forms (Form 1120 Schedule UTP, Form 5471 Schedule M, and Form 5472) already collect the same information. (Done, Checked out, Why are you bothering me?)

But wait. Are small and mid-size US MNEs in the clear? The answer, unfortunately is no. While it is true that US MNEs will not be subject to CbC reporting even after the regulations are finalized due to the $850 million trhreshold, and it is true that the US tax authorities have no plans to require Master File and Local File reporting, small and mid-size US MNE may still have a significant compliance burden beginning in the 2016 tax year.

The Master File

The Master File is a document that provides a blueprint of the entire MNE with specific detailed information on the following 5 categories:

  1. Organizational structure
  2. Business description including profit drivers, supply chains, intercompany services agreements, and a functional analysis of all value creation activities
  3. Intangible assets owned including the MNE overall strategy for R&D and a general description of the transfer pricing policies related to those intangibles and R&D activities
  4. Intercompany financing activity
  5. Financial and tax positions including a list of any advance pricing agreements (APA)

The Master File is to be prepared by the parent of the MNE and filed with the parent’s home country tax authority. OECD and non OECD countries alike are currently implanting Master File and Local File reporting requirements, most with a consolidated revenue threshold of euro 50 million.

OK, so the first bit of good news is that most US MNEs will not have a Master File filing responsibility.

Now for the bad news. The Local File is a document that provides detailed information to the taxing authority in the local entity’s tax jurisdiction. This information includes:

  1. A detailed description of the business and business strategy of the local entity
  2. Transfer Pricing documentation of all material controlled transactions including a description of the controlled transactions, copies of all intercompany agreements, best (or most appropriate) method selection, selection of comparable transactions, and a list of any APAs

Local Files

Local Files can be required by the local taxing jurisdiction regardless of whether a Master File is required of or prepared by the parent of MNE. The same threshold of MNE consolidated revenue of euro 50 million applies to the Local File. To date, a number of countries have adopted Master File and Local file requirements for the 2016 tax year. One such country is the Netherlands. Dutch penalties for failure to file the Local File include a fine of euro 8,100 (unintentional) and euro 20,250 (intentional). However, Dutch penalties also include criminal penalties of up to 6 months in prison (unintentional) and up to 4 years (intentional). Other countries that have adopted CbC, Master File and Local File reporting requirements include France, Italy, Japan, and Mexico among others.

US MNEs should immediately determine if they have a requirement to file a Local File for one or more of their foreign operations. If a filing requirement is identified, the US MNE should ensure that its transfer pricing documentation is sufficient to comply with those filing requirements.


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