BEPS Action Plan 13: Transfer pricing documentation

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

Business World (11/09/2015 – p.S1/2)

(Second of two parts)

Last week, we began the discussion on the 3-tiered standardized approach to Transfer Pricing (TP) documentation that is prescribed in Base Erosion and Profit Shifting (BEPS) Action Plan 13, which amended certain sections of the Organization of Economic Cooperation and Development Transfer Pricing (TP) Guidelines. This 3-tiered standardized approach requires the preparation of a Master File, a Local File, and Country-by-Country Report (CBCR), following a prescribed template.

While the standardized approach to TP documentation is expected to simplify the TP documentation process, issues in the implementation of such an approach are still bound to arise. Action Plan 13 recognizes the possibility that these issues may arise and suggests the adoption of appropriate “best practices” to address them.

These issues may include the proper timing in obtaining the comparables’ data or information that will form the basis of any TP analysis for a particular year, the time frame within which the different TP reports will have to be prepared, and the question of whether all related party transactions will have to be covered in TP documentation. There are also issues concerning penalty, retention, frequency of updates, confidentiality and choice of comparables.


In establishing arm’s length prices, taxpayers should consider comparables’ data or information reasonably available at the time of the transaction. A taxpayer should determine whether its TP is appropriate before the pricing is established, and should confirm the arm’s length nature of its financial results at the time of filing its tax return.


The following time frames should be considered in the preparation of the Master File, Local File, and the CBCR:

· The Local File should be finalized not later than the filing of the tax return of the local entity for the fiscal year in question;
· The Master File should be reviewed and, if necessary, updated at the time of the filing of the tax return of the ultimate parent of the multinational enterprise (MNE) group;
· The CBCR may be finalized one year after the last day of the fiscal year of the ultimate parent of the MNE group.


Individual country TP documentation requirements should include specific materiality thresholds for transactions before they may be covered in the documentation. The threshold will take into account the size and the 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. Materiality thresholds may consider a percentage of revenue or cost or a certain amount. Action Plan 13 recommends that SMEs should not be required to produce the same level of documentation expected from larger enterprises.


Taxpayers should not be obliged to retain documents beyond a reasonable period that is required under domestic law at either the parent company or local entity level. Tax administrations should refrain from requesting for prior-year documents unless they are needed in connection with the transaction under examination.

The choice of the medium in which TP documentation is to be stored (whether in paper, electronic form, or in any other system) should be left to the discretion of the taxpayer, provided the documentation can promptly be given to the tax administration.


The Master File, Local File and the CBCR should be reviewed and updated annually. This takes into consideration, however, that business descriptions, functional analyses, and descriptions of comparables may not change significantly from year to year.

Generally, a comparable search and benchmarking analysis may be done every 3 years. However, financial data for the comparables should be updated annually.


The practice of imposing penalties for the non- or late submission of TP documentation is largely governed by local laws and is structured to ensure compliance from taxpayers.

Instead of the imposition of penalties, compliance incentives may be given to taxpayers who provide timely and adequate TP documentation. These incentives may include exemption from tax penalties; or a lower penalty rate if a TP adjustment is made and sustained; or a shift of the burden of proof to the tax administration’s side where adequate documentation is provided.


A TP documentation package (Master File, Local File and CBCR) is a comprehensive set of documents and data, which contains sensitive and confidential information concerning a taxpayer’s business. Tax administrations should take reasonable steps to avoid public disclosure of confidential information (trade secrets, scientific secrets, etc.) and other commercially sensitive information contained in the documentation package, and should ensure that any information presented will remain confidential.


A recurring issue concerning the TP documentation process concerns the selection of comparable companies. Local comparables may be used over regional comparables, if they are reasonably available. The obvious benefits of using regional comparables (by simplifying the compliance process as well as lowering the compliance costs) should not be a reason to forego the use of the most reliable available information found in local comparables.


With the release of the final BEPS Action Plan 13 report, both MNEs and tax administrations now have a common and consistent set of guidelines and best practices on which to base TP reporting and documentation. Having a common framework will not only help MNEs affirm their compliance with international TP regulations and reduce cost and complexity, it will also benefit tax administrations by providing clear ways to assess TP issues while also helping facilitate information exchange with tax authorities in other jurisdictions.

Reynante M. Marcelo is a Tax Partner and Ronald Steven A. Arriesgado is a Senior Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.