BEPS action plan 13: Transfer pricing and country reporting

SUITS THE C-SUITE By Reynante M. Marcelo and Ronald Steven A. Arriesgado

Business World (03/16/2015 – p.S1/4)

(First of two parts)

THIS article continues our series on Base Erosion and Profit Shifting (BEPS), specifically looking at Action Plan 13, which prescribes a revised set of standards for transfer pricing (TP) documentation and a template for country-by-country reporting (CBCR) of income, earnings, taxes paid and certain measures of economic activity.

Chapter V of the TP Guidelines of the Organization for Economic Co-operation and Development (OECD) has been completely revised to introduce a three-tiered approach to ensure that tax administrations are provided with sufficient and comprehensive information to conduct TP risk assessments and examinations. At the same time, the changes in the rules aim to make the process of preparing the required TP documentation less burdensome and costly to concerned taxpayers.


The revised guidelines propose a standardized approach to TP documentation, consisting of a three-tiered structure:

· Master file;
· Local file; and
· Country-by-country report.


In essence, the master file provides a high-level overview of the business of the Multinational Enterprise (MNE) as a whole, which includes its global business operations, overall TP policies, and global allocation of income and economic activity.

The master file is the MNE’s “blueprint” and contains relevant information that may be grouped into five categories:

· Group’s organizational structure — this should include a chart illustrating the MNE’s legal and ownership structure and the geographical location of the operating entities;

· Description of business or businesses — this would include information on important drivers of business profit, a description of the MNE group’s supply chain, and the main geographic markets of the group’s products and services;

· Intangibles — these comprise a list of intangibles and the MNE’s overall strategy for the development, ownership and exploitation of intangibles;

· Intercompany financial activities — these will show how the MNE group is financed and which among the group members provides a central financing function for the group; and

· Financial and tax positions — these include the MNE’s annual consolidated financial statements for the fiscal year involved, as well as a list of the MNE’s existing unilateral advance pricing agreements (APAs) and other tax rulings.


In contrast to the master file, the local file presents detailed information on specific related party transactions. The local file is intended to supplement the master file by ensuring that the taxpayer has complied with the arm’s length principle in its TP practices affecting a specific jurisdiction.

In other words, the local file focuses on inter-company transactions taking place between a local country affiliate and related parties in different countries, which are material in the context of the local country’s tax system. Specifically, the following information should be provided in the local file:

· A description of the material controlled transactions;
· The amount of intra-group payments and receipts;
· An identification of the related parties involved;
· A detailed comparability and functional analysis of the taxpayer and related parties;
· An indication of the most appropriate TP method and the reasons for selecting that method;
· An indication of which related party is selected as the tested party, if applicable, and an explanation of the reasons for this selection;
· A list and description of selected comparable uncontrolled transactions, if any, and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information; and,
· A copy of existing APAs and other tax rulings.


The CBCR presents consolidated information on global allocation of income, taxes, and indicators of economic activity among the tax jurisdictions in which the MNE group operates. Specifically, the CBCR should include a list of all the “Constituent Entities.” A constituent entity is defined as any separate business unit of the MNE group that is included in the consolidated group for financial reporting purposes.

A model template is provided to aid taxpayers in preparing the CBCR. The CBCR should contain the following information:

· An overview (in tabular form) of the MNE’s allocation of income, taxes and business activities by tax jurisdiction, containing the following: revenues from related and unrelated parties; profit before income tax; income tax paid and accrued; stated capital; accumulated earnings; number of employees; and tangible assets;

· A list of the constituent entities according to tax jurisdiction of incorporation, specifying the main business activity of the entities.

By providing comparative information on income and taxes paid per entity operating in a particular tax jurisdiction, the CBCR will prove useful to tax administrations in evaluating whether profits are, indeed, being shifted to gain a tax advantage, and are not in line with where the economic activities are undertaken and where value is created.

In the second part of this article, we will look deeper into the CBCR and discuss the OECD guidelines to address the possible issues that may arise from its implementation.

Reynante M. Marcelo is a Tax Partner while Ronald Steven A. Arriesgado is a Senior Director, respectively, of SGV & Co. Both specialize in Transfer Pricing.