September Manual for Transfer Pricing Documentation and Country-by-Country Reporting

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1 September 2015 Manual for Transfer Pricing Documentation and Country-by-Country Reporting

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3 Contents 1. Introduction 4 2. Background 5 3. Master file and local file Introduction The master file The local file Practical issues Country-by-Country Reporting Introduction Threshold to file the CbC Report What needs to be filed? Who needs to file? Which sources of data can be used? In what currency should the CbC Report be filed? How will the CbC Reports be shared between tax administrations? What happens if an MNE does not fully or timely file the CbC Report? Practical issues CbC Report - Developing an action plan 16 Annex I 18 A model template for the Country-by-Country Report Annex II 20 Comparative Table - the Guidance and EU Code of Conduct on Transfer Pricing Documentation (EU TPD) 3

4 1. Introduction In various deliverables that have been issued by the Organization for Economic Co-operation and Development (OECD), new guidance has been given in relation to transfer pricing documentation requirements and a newly introduced concept of Country-by-Country (CbC) Reporting in the context of Action 13 of the OECD/ G20 Base Erosion and Profit Shifting (BEPS) project. The new requirements will impose significant new burdens on multinational enterprises (MNEs) in preparing the required documentation and in dealing with audits from tax administrations after reviewing the documentation. In a new Bill that was released on 15 September 2015 (Dutch Bill), the Dutch Government implemented the new transfer pricing documentation requirements and CbC Reporting obligations based on the guidance that was issued by the OECD. This manual describes the contents of the new transfer pricing documentation requirements (in the form of a master file, local file and CbC Report) that have been adopted by the OECD and it provides a step-plan on how to implement the CbC Reporting obligations. Moreover, this manual outlines the more important practical and implementation issues that MNEs will face as well as some potential solutions to those issues. This manual further elaborates on the contents of the Dutch Bill. 4

5 2. Background In September 2014, the OECD published the final version of a new Chapter V of the OECD Transfer Pricing Guidelines (OECD Guidelines), i.e. Guidance on Transfer Pricing Documentation and Country-by-Country Reporting (Chapter V of the OECD Guidelines). Chapter V of the OECD Guidelines provides substantially revised transfer pricing documentation requirements (i.e. blueprints of a global master file and local file) and a common template for CbC Reporting. In February 2015, the OECD released the Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting (Guidance), which primarily relates to the implementation of CbC Reporting. In June 2015, the OECD released a package for implementing CbC Reporting in accordance with the Guidance (CbC Reporting Implementation Package), that consists of model legislation and three model Competent Authority Agreements that could be used to facilitate the implementation of the CbC Reporting and the automatic exchange of information between tax administrations. In the Guidance and CbC Reporting Implementation Package, certain practical aspects have been clarified. While issuing the CbC Reporting requirements and by taking into account the public comments, the OECD has tried to limit the compliance burden for MNEs by e.g. arranging that (i) MNEs have been given the flexibility to use a wide variety of organized sources of financial information, (ii) MNEs are not obliged to disclose information for each entity operating in a country separately, (iii) MNEs are not obliged to reconcile the revenue, profit, and tax reporting in the template to the consolidated financials and (iv) MNEs are not required to make adjustments for differences in accounting principles applied in different tax jurisdictions. However, the CbC Reporting requirements still pose significant challenges for MNEs since the contents of Chapter V of the OECD Guidelines, the Guidance and the CbC Reporting Implementation Package leave room for many interpretations and many questions remain to be answered. Many countries consider the OECD Guidelines as soft law and a revision of Chapter V of the OECD Guidelines often does not have a direct effect. Some countries are already introducing revised transfer pricing documentation requirements and CbC Reporting in hard law, such as the Netherlands, United Kingdom, Spain, United States, Australia and Poland. Continuous activity is expected from many other countries that are now evaluating how to adapt their legislation to the new requirements. 5

6 The scheduled effective date of new legislation that introduces CbC Reporting and/or new transfer pricing documentation requirements is 1 January Following the work of the EU Joint Transfer Pricing Forum (EU JTPF) in 2006 (EU Code of Conduct on Transfer Pricing Documentation), many companies have already spontaneously adopted the concept of the master file and local file as proposed at the time. However, significant differences can be noted among the EU JTPF Code of Conduct on Transfer Pricing Documentation requirements and the contents of the new Chapter V of the OECD Guidelines (see Annex II). The recommendations related to the master file and the local file as laid down in Chapter V of the OECD Guidelines introduce new requirements that will demand a review and update of the existing current transfer pricing documentation. For the introduction of the CbC Reporting, a new process of data gathering and information alignment across the global group will be required. MNEs will need to make significant efforts to comply with the new requirements. 6

7 3. Master file and local file 3.1. Introduction 3.2. The master file Chapter V of the OECD Guidelines provides a new guidance on what information should be included in a master file and local file. The master file should provide a high-level overview of the MNE group s global business structure and its transfer pricing policies. The local file is meant to supplement the master file and is intended to deliver a more detailed overview of the specific intra-group transactions that are entered into by a specific taxpayer and the reconciliation of the transfer pricing policies with the actual result. According to the OECD, the appropriateness of the details of the master file and local file should be determined by the taxpayers, bearing in mind its final goal, which is to assist tax administrations in evaluating the presence of significant transfer pricing risks, in a global context. Paragraph 3.2. describes the information that should according to the OECD be included in the master file. Paragraph 3.3. describes the information that should according to the OECD be included in the local file. Paragraph 3.4. deals with certain practical aspects that should be kept in mind while preparing the master file and local file. The master file shall require a blue print of the MNE group, divided in five categories: (i) the MNE group s organisational structure (ii) a description of the MNE business(es) (iii) the MNE intangibles (iv) the MNEs intercompany financial transactions (v) the MNEs financial and tax position. More specifically, the following information should be included in the master file: Organisational structure Chart illustrating the MNEs legal and ownership structure and geographical location of operating entities. Description of MNEs business(es) General written description of the MNEs business including: - Important drivers of business profit; - A description of the supply chain for the group s five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5 percent of group turnover. The required description could take the form of a chart or a diagram; - A list and brief description of important service arrangements between members of the MNE group, other than research and development (R&D) services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services; 7

8 - A description of the main geographic markets for the group s products and services that are referred to in the second bullet point above; - A brief written functional analysis describing the principal contributions to value creation by individual entities within the group, i.e. key functions performed, important risks assumed, and important assets used; - A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year. MNEs intangibles (as defined in Chapter VI of these Guidelines) A general description of the MNEs overall strategy for the development, ownership and exploitation of intangibles, including location of principal R&D facilities and location of R&D management. A list of intangibles or groups of intangibles of the MNE group that are important for transfer pricing purposes and which entities legally own them. A list of important agreements among identified associated enterprises related to intangibles, including cost contribution arrangements, principal research service agreements and license agreements. A general description of the group s transfer pricing policies related to R&D and intangibles. A general description of any important transfers of interests in intangibles among associated enterprises during the fiscal year concerned, including the entities, countries, and compensation involved. MNEs intercompany financial activities A general description of how the group is financed, including important financing arrangements with unrelated lenders. The identification of any members of the MNE group that provide a central financing function for the group, including the country under whose laws the entity is organised and the place of effective management of such entities. - A general description of the MNEs general transfer pricing policies related to financing arrangements between associated enterprises MNEs financial and tax positions The MNEs annual consolidated financial statement for the fiscal year concerned if otherwise prepared for financial reporting, regulatory, internal management, tax or other purposes. A list and brief description of the MNE group s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries. 8

9 3.3. The local file The objective of the local file is to assure that the MNE has complied with the arm s length principle in its material transfer pricing positions affecting a specific jurisdiction. The local file should provide information relating to specific intercompany transactions entered into in a specific country. Such information would include: (i) relevant financial information regarding those specific transactions, (ii) a comparability analysis, and (iii) the selection and application of the most appropriate transfer pricing method. The following information should be included in the local file: Local entity A description of the management structure of the local entity, a local organisation chart, and a description of the individuals to whom local management reports and the country(ies) in which such individuals maintain their principal offices. A detailed description of the business and business strategy pursued by the local entity including an indication whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediately past year and an explanation of those aspects of such transactions affecting the local entity. Key competitors. Controlled transactions For each material category of controlled transactions in which the entity is involved, provide the following information: A description of the material controlled transactions (e.g. procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, licences of intangibles, etc.) and the context in which such transactions take place. The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e. payments and receipts for products, services, royalties, interest, etc.) broken down by tax jurisdiction of the foreign payor or recipient. An identification of associated enterprises involved in each category of controlled transactions, and the relationship amongst them. Copies of all material intercompany agreements concluded by the local entity. A detailed comparability and functional analysis of the taxpayer and relevant associated enterprises with respect to each documented category of controlled transactions, including any changes compared to prior years. 1 An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting that method. An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection. A summary of the important assumptions made in applying the transfer pricing methodology. If relevant, an explanation of the reasons for performing a multi-year analysis. 1 To the extent this functional analysis duplicates information in the master file, a cross-reference to the master file is sufficient. 9

10 A list and description of selected comparable uncontrolled transactions (internal or external), 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. A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transactions, or both. A description of the reasons for concluding that relevant transactions were priced on an arm s length basis based on the application of the selected transfer pricing method. A summary of financial information used in applying the transfer pricing methodology. A copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions described above Practical issues In this paragraph, we will elaborate on the practical issues that should be kept in mind while preparing the master file and local file. Consistency in transfer pricing documentation Chapter V of the OECD Guidelines requires MNEs to prepare a consistent story in all relevant countries, all years and all media. In order to prepare for the new transfer pricing documentation requirements, we recommend gathering information from a variety of sources, such as tax returns, existing transfer pricing documentation, APAs, tax positions taken in the financial statements and publicly available information (i.e. via internet) that has not been prepared for tax purposes (e.g. job applications that are posted on the internet). While gathering and reviewing this information, it should be assessed how the various tax administrations may view this information when considered in conjunction with the information presented in the CbC Report. Financial information Annual local entity financial accounts for the fiscal year concerned. If audited statements exist they should be supplied and if not, existing unaudited statements should be supplied. Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements. Summary schedules of relevant financial data for comparables used in the analysis and the sources from which that data was obtained. Master file and local file in accordance with templates Many MNEs currently have transfer pricing documentation that has both elements of a master file and local file. It is crucial that the currently existing transfer pricing documentation is updated along the lines of the required information that has been described in paragraph 3.2. and

11 No threshold for master file and local file Contrary to the guidance that has been given on CbC Reporting, no specific threshold has been provided for the preparation of a master file and local file. This implies that the preparation of a master file and local file could also be obligatory for MNEs that have consolidated revenues of less than EUR 750 million. However, domestic legislation can provide exemptions for small and median sized MNEs (SMEs). Domestic thresholds will differ among countries. In the Dutch Bill, the Dutch government proposed to make it obligatory for an entity to prepare a master file and local file if that entity belongs to a group that has consolidated revenues of more than EUR 50 million. Timing and potential penalties Practices regarding the timing of the documentation differ among countries. In combination with the fact that it is indicated that penalties are a frequently used tool to ensure efficient operation of transfer pricing documentation requirements, this leads to the necessity of reviewing the various timing requirements in the various countries. According to the Dutch Bill, the master file and local file should be available in the administration of the tax payer by the due date of the tax return. If the master file and local file are not included in the administration, the previously existing penalty regime applies for not meeting the administration requirements. Annual update of financial information comparables from database searches Many MNEs use database searches that are 3-5 years old. In Chapter V of the OECD Guidelines, it is now indicated that, as long as the operating conditions remain the same, the selection of comparable companies only should take place every three years. The financial information of those comparables should be updated annually, however. In practice, this may require a yearly update of the benchmark study. Language The language in which transfer pricing documentation should be submitted is a matter of local laws. While countries are encouraged by the OECD to permit filing of documentation in commonly used languages, some countries have already indicated that they will require translation into local language. According to the Dutch Bill, the master file and local file can be prepared in both Dutch and English. Reconciliation with financial statements It is required to show how the financial data used in applying the transfer pricing method is reconciled to the annual financial statements. It is crucial to prepare this reconciliation prior to finalizing the financial statements. 11

12 4. Country-by-Country Reporting 4.1. Introduction 4.3. What needs to be filed? Chapter V of the OECD Guidelines provides for a detailed description what items should be reported in the newly developed rules on CbC Reporting. The Guidance and the CbC Reporting Implementation Package provide further practical guidance for countries on how to implement the CbC Reporting requirements. We address the main aspects of CbC Reporting in the next subparagraphs Threshold to file the CbC Report MNEs with an annual consolidated group revenue in the immediately preceding fiscal year of less than EUR 750 million should not be required to file the CbC Report in any country. This threshold is intended to be reviewed in In the CbC Report, MNEs should report revenue, profit before income tax, income paid and accrued, total employment, capital, retained earnings, and tangibles assets per tax jurisdiction. It is not required to specify this information per Constituent Entity. A Constituent Entity is defined as any separate business unit (company, corporation, trust, partnership, etc.) that is included in the consolidated group for reporting purposes. Entities excluded from financial statements only on size and materiality grounds should also be included. The term Constituent Entity also includes a permanent establishment of an entity of an MNE provided such permanent establishment prepares a separate income statement for regulatory, financial, internal management or tax purposes. The threshold that is described in Chapter V OECD Guidelines relates to revenues and not to turnover. In Chapter V OECD Guidelines, the revenues that need to be reported per country include more items than turnover (e.g. amounts received due to sale of inventory, or due to sale of properties) and this should be kept in mind while determining whether an MNE is obliged to file a CbC Report. It is further required to provide a list of all the Constituent Entities, their activities and their country of incorporation if this is different from their tax residency. A detailed overview of the template and information that is required with a more detailed description of the items has been attached as Annex I. 12

13 4.4. Who needs to file? Based on the CbC Reporting Implementation Package, countries should implement legislation under which the MNEs Ultimate Parent Entity is responsible for filing the CbC Report annually in its home jurisdiction. This has also been adopted in the Dutch Bill. The Ultimate Parent Entity is a Constituent Entity of an MNE Group that meets the following criteria: (i) its owns directly or indirectly a sufficient interest in one or more other Constituent Entities of such MNE Group such that it is required to prepare Consolidated Financial Statements (in which the assets, liabilities, income, expenses and cash flows of the Ultimate Parent Entity and the Constituent Entities are presented as those of a single economic entity) under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on a public securities exchange in its jurisdiction of tax residence; and (ii) there is no other Constituent Entity of such MNE Group that owns directly or indirectly an interest described in subsection (i) above in the first mentioned Constituent Entity. (accordantly with the CbC Reporting Implementation Package) In case of failure of filing, in case the Ultimate Parent Entity is not obliged to file the CbC Report in its home jurisdiction, or in cases where the CbC Report is effectively not shared by the tax administration of the MNEs Ultimate Parent Company, each Constituent Entity shall be obliged to file the CbC Report, unless if a qualifying replacement (Surrogate Parent Entity) has been appointed by the MNE group as a sole substitute for the Ultimate Parent Entity. The CbC report shall be filed no later than 12 months after the last day of the year (consolidated reporting period for financial statement purposes) to which the CbC Report relates. In practice, this implies that for: (i) MNEs with a fiscal year beginning on or after 1 January 2016, the CbC Report should be filed by 31 December 2017; (ii) MNEs with a fiscal year ending on a date other than 31 December, the CbC Report should be filed in the year 2018, i.e. 12 months after the end of the MNEs relevant fiscal year Which sources of data can be used? An MNE may choose to use data from its consolidation package, from separate entity statutory financial statements, regulatory financial statements, or internal management accounts or a mix of these sources as long as the MNE does this consistently throughout the years. It is not necessary to reconcile the revenue, profit and tax reporting in the template to the consolidated financial statements. An MNE should, however, provide a brief description of the sources of data that are used in preparing the CbC Report. If a change is made in the source of data, the reasons therefore should be explained in the Additional Information section of the templates. No adjustments need to be made for differences in accounting principles that are applied between tax jurisdictions. 13

14 4.6. In what currency should the CbC Report be filed? 4.8. What happens if an MNE does not fully or timely file the CbC Report? If statutory accounts are used as the basis for the reporting, all amounts should be translated to the stated functional currency of the MNE as a whole at the average exchange rate. The model legislation does not include provisions regarding penalties to be imposed in the event that an MNE fails to comply with the CbC Reporting requirements. The Dutch Bill proposes severe penalties including imprisonment if the CbC Report is not filed How will the CbC Reports be shared between tax administrations? The CbC Reporting Implementation Package provides three models of Competent Authority Agreements that can be used to facilitate the exchange of the CbC Reports. These Competent Authority Agreements are based on (i) the Multilateral Convention on Administrative Tax Matters, (ii) bilateral tax conventions and (iii) Tax Information Exchange Agreements. Tax administrations are expected to automatically exchange the CbC Reporting with jurisdictions that have also implemented CbC Reporting requirements and that have ascertained the confidentiality thereof in their legislation. The explanatory notes to the Dutch Bill indicate that the tax administration exchanges the CbC Report on the basis of a multilateral or bilateral agreement. This will be up to the jurisdictions while implementing these requirements. It has neither been arranged how interpretation differences between the taxpayer and the tax administrations should be resolved Practical issues In this paragraph, we will elaborate on certain practical issues that should be kept in mind while preparing the CbC Report. Determine which source of data will be used As described above, the OECD has indicated that an MNE may choose to use data from its consolidation package, from separate entity statutory financial statements, regulatory financial statements, or internal management accounts. It should be assessed upfront which sources are mostly suited for this purpose and what the advantages and disadvantages are of using a specific source of data. Prepare for reconciliation with filed corporate income tax returns Although Chapter V OECD Guidelines does not require reconciliation, it can be expected that tax authorities will require a reconciliation of the CbC Report with the locally filed corporate income tax returns in order to order to avoid surprises. 14

15 Avoid inconsistencies It is essential to align the information of the CbC Report with the information disclosed in the master file and local file. Moreover, the content of the CbC Report should also be in line with other sources of information that are available to tax authorities, such as the website, financial statements, tax returns etc. Prepare a narrative to explain inconsistencies Where inconsistencies cannot be avoided, questions can be expected. It could be considered to prepare an explanation to these questions beforehand, or even prepare a narrative and make this available to the tax authorities. (i) Definition of revenues In the clarification of the items that will have to be reported in the CbC Report, it is noted that revenues should include revenues from sale of inventory and properties, services, royalties, interest, premiums and any other amounts. Revenues should exclude payments received from other Constituent Entities that are treated as dividends in the payor s tax jurisdiction. The definition of revenues should not be interpreted as turnover (as e.g. stated in the statutory accounts). Avoid misinterpretations There are certain items that leave room for improved understanding. These items are the following: (i) (ii) Employees and independent contractors In the clarification of the items that should be reported in the CbC Report in relation of the number of employees that have to be reported it is noted that, independent contractors participating in the ordinary operating activities of the Constituent Entities may be reported as employees. Definition of income tax payable and withholding tax In the clarification of the items that will have to be reported in the CbC Report, it is noted that taxes paid include withholding taxes paid by other entities (associated and independent enterprises) with respect to the payment to the Constituent Entity. 15

16 5. CbC Report - Developing an action plan According to the OECD recommendations, the first CbC Reports should be filed by 31 December The expected impact for MNEs is an increased compliance burden, more questions during audits and potentially risks of double taxation. To prepare for this, MNEs are advised to develop an action plan and build a strategy. With the right approach the MNE will be more efficient, accurate, and prepared for discussions and audits. An action plan could consist of preparation of resources, collection of data, analysis of data and considering strategic opportunities. As part of the preparation, the MNE can consider to perform a dry run with a limited number of test countries. The outcome of the dry run will allow the MNE to identify red flags, inconsistencies and potential vulnerabilities. Subsequently, these can be corrected and the transfer pricing policy can be amended where deemed appropriate. The objective of the CbC Reporting for MNEs is to demonstrate a consistent global allocation of profits and taxes aligned with the business activities of the group. Step 1: Determine whether CbC Reporting obligation exists Step 2: Preparation of resources Step 3: Collection of data Identify the existing data resources and determine the most appropriate one The MNE should make sure that sufficient resources are available. Manage input from various jurisdictions Selection of a CbC Reporting team, consisting of employees from various departments: finance, tax, HR, business Manage input from different parts of the enterprise (finance, tax, HR) Involvement of the tax department from the beginning Data review across all countries to ensure consistency Upgrade of technology systems to more accurately capture the data Make judgements on definitions 16

17 Step 4: Analysis of data Once all data have been collected, the CbC Report can be prepared. Identify and solve difficulties, e.g. currency issues, elimination & allocation of group corrections Coordination between CbC Report, master file and local file Step 5: Identify and respond to strategic opportunities Although the CbC Reporting will increase the MNEs compliance burden, it can also be used as a means to identify opportunities and take strategic decisions. Together with the master file and the local file, the CbC Report is a means to improve & manage the group s transfer pricing compliance and risks Coordination between CbC Report and other available sources of information (website, tax return, accounts ) Changes to intercompany transactions and pricing can be considered to improve and influence the alignment of profits to business activities generating profits Identify inconsistencies If inconsistencies cannot be eliminated, decide whether a narrative should be prepared upfront as explanation to the tax authorities Prepare to expected questions 17

18 Annex I A model template for the Country-by-Country Report 18

19 A model template for the Country-by-Country Report Table 1. Overview of allocation of income, taxes and business activities by tax jurisdiction Include revenues from sales of inventory and properties, services, royalties, interest, premiums and any other amounts. Exclude payments received from other Constituent Entities that are treated as dividends in the payer s tax jurisdiction. All the tax jurisdictions in which Constituent Entities of the MNE group are resident for tax purposes. A separate line must be included for all Constituent Entities in the MNE group deemed by the Reporting MNE not to be resident in any tax jurisdiction. Taxes actually paid during the relevant fiscal year. Include cash taxes paid by the Constituent Entity to the residence tax jurisdiction and to all other tax jurisdictions, withholding taxes paid by other entities (associated enterprises and independent enterprises) with respect to payments to the Constituent Entity. Tax Jurisdiction Unrelated Party Revenues Related Party With regard to permanent establishments, accumulated earnings must be reported by the legal entity of which it is a permanent establishment. Total Include all extraordinary income and expense items. Profit (Loss) Before Income Tax Name of the MNE Group: Fiscal year concerned: Income Tax Paid (on cash basis) Income Tax Accrued - Current Year Stated capital Only operations in the current year and should not include deferred taxes or provisions for uncertain tax liabilities. Accumulated earnings Number of Employees Tangible Assets other than Cash and Cash Equivalents The total number of employees on an FTE basis. It may be reported as of the year-end, on the basis of average employment levels for the year, or on any other basis consistently applied across tax jurisdictions and from year to year. For this purpose, independent contractors participating in the ordinary operating activities of the Constituent Entity may be reported as employees. With regard to permanent establishments, must be reported by the legal entity of which it is a permanent establishment unless there is a defined capital requirement in the permanent establishment tax juris diction for regulatory purposes. With regard to permanent establishments, assets must be reported in the tax jurisdiction in which the permanent establishment is situated. Tangible assets for this purpose do not include cash or cash equivalents, intangibles, or financial assets. Table 2. List of all the Constituent Entities of the MNE group included in each aggregation per tax jurisdiction Name of the MNE Group: Fiscal year concerned: Main business activity (ies) Tax Jurisdiction Constituent Entities resident in the Tax Jurisdiction Tax Jurisdiction of organisation or incorporation if different from Tax Jurisdiction of Residence Research and Development Holding or Managing intellectual property Purchasing or Procurement Manufacturing or Production Sales, Marketing or Distribution Administrative, Management or Support Services Provision of Services to unrelated parties Internal Group Finance Regulated Financial Services Insurance Holding shares or other equity instruments Dormant Other The permanent establishment should be listed by reference to the tax jurisdiction in which it is situated. The legal entity of which it is a permanent establishment should be noted. A Constituent Entity is defined as any separate business unit (company, corporation, trust, partnership, etc.) that is included in the consolidated group for reporting purposes. Entities excluded from financial statements only on size and materiality grounds should also be included. The term Constituent Entity also includes a permanent establishment of an entity of an MNE provided such permanent establishment prepares a separate income statement for regulatory, financial, internal management or tax purposes. The name of the tax jurisdiction under whose laws the Constituent Entity of the MNE is organised or incorporated if it is different from the tax jurisdiction of residence. The Reporting MNE should determine the nature of the main business activity(ies) carried out by the Constituent Entity in the relevant tax jurisdiction, by ticking one or more of the appropriate boxes. 19

20 Annex II Comparative Table - the Guidance and EU Code of Conduct on Transfer Pricing Documentation (EU TPD) 20

21 What should the Master File provide? EU - TPD A Blueprint of the MNE group and its transfer pricing system, relevant and available to all EU MS concerned. OECD - BEPS A blueprint of the MNE group and relevant information. An overview of the MNE group business. Possibility to use cross-reference to other documents. Covers all group entities resident in the EU including controlled transaction between enterprises resident outside the EU. Information for the MNE as a whole. Possibility to produce more than one MF or to exempt specific group members from the EU TPD, in well justified cases. Organization of the information presented by line of business is permitted where well justified, but the entire MF should be available to each country. 21

22 Which information should be included in the Master File? EU - TPD A general description of the MNE group s organisational, legal and operational structure (including an organization chart, a list of group members and a description of the participation of the parent company in the subsidiaries); OECD - BEPS Chart illustrating the MNEs legal and ownership structure and geographical location of operating entities. A general description of the business and business strategy, including changes in the business strategy compared to the previous tax; The general identification of the associated enterprises engaged in controlled transactions involving enterprises in the EU; A general description of the controlled transactions involving associated enterprises in the EU, i.e. a general description of: (i) flows of transactions (tangible and intangible assets, services, financial), (ii) invoice flows, and (iii) amounts of transaction flows. Description of MNEs business(es) including: Important drivers of business profit; A description of the supply chain for the group s five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5 percent of group turnover. The required description could take the form of a chart or a diagram; A list and brief description of important service arrangements between members of the MNE group, other than research and development (R&D) services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services; A description of the main geographic markets for the group s products and services that are referred to in the second bullet point above. A general description of functions performed, risks assumed and a description of changes in functions and risks compared to the previous tax year, e.g. change from a fully-fledged distributor to a commissionaire. A brief written functional analysis describing the principal contributions to value creation by individual entities within the group, i.e. key functions performed, important risks assumed, and important assets used; A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year. 22

23 Which information should be included in the Master File? EU - TPD The ownership of intangibles (patents, trademarks, brand names, know-how, etc.) and royalties paid or received. OECD - BEPS MNE s intangibles: A general description of the MNEs overall strategy for the development, ownership and exploitation of intangibles, including location of principal R&D facilities and location of R&D management. A list of intangibles or groups of intangibles of the MNE group that are important for transfer pricing purposes and which entities legally own them. A list of cost contribution agreements, Advance Pricing Agreements and rulings covering transfer pricing. A list of important agreements among identified associated enterprises related to intangibles, including cost contribution arrangements, principal research service agreements and licence agreements. The MNE group s inter-company transfer pricing policy or a description of the group s transfer pricing system that explains the arm s length nature of the company s transfer prices. A general description of the group s transfer pricing policies related to R&D and intangibles. A general description of any important transfers of interests in intangibles among associated enterprises during the fiscal year concerned, including the entities, countries, and compensation involved. The MNE group s inter-company transfer pricing policy or a description of the group s transfer pricing system that explains the arm s length nature of the company s transfer prices. MNE s intercompany financial activities: A general description of how the group is financed, including important financing arrangements with unrelated lenders. The identification of any members of the MNE group that provide a central financing function for the group, including the country under whose laws the entity is organised and the place of effective management of such entities. A general description of the MNEs general transfer pricing policies related to financing arrangements between associated enterprises. 23

24 Which information should be included in the Master File? EU - TPD A list of cost contribution agreements, Advance Pricing Agreements and rulings covering transfer pricing aspects as far as group members in the EU are affected. OECD - BEPS MNE s financial and tax positions: The MNEs annual consolidated financial statement for the fiscal year concerned if otherwise prepared for financial reporting, regulatory, internal management, tax or other purposes. A list and brief description of the MNE group s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries. 24

25 What should the Local File provide? EU - TPD The content of the country-specific documentation supplements the master file. Together the two constitute the documentation file for the relevant EU Member State. The country-specific documentation would be available to those tax administrations with a legitimate interest in the appropriate tax treatment of the transactions covered by the documentation. OECD - BEPS A high-level overview, with more detailed information relating to specific intercompany transactions. The information supplements the master file and helps to meet the objective of assuring that the taxpayer has complied with the arm s length principle in its material transfer pricing positions affecting a specific jurisdiction. Focus on information relevant to the transfer pricing analysis related to transactions taking place between a local country affiliate and associated enterprises in different countries and which are material in the context of the local country s tax system. Which information should be included in the Local File? EU - TPD A detailed description of the business and business strategy, including changes in the business strategy compared to the previous tax year. OECD - BEPS Local entity A description of the management structure of the local entity, a local organisation chart, and a description of the individuals to whom local management reports and the country(ies) in which such individuals maintain their principal offices. A detailed description of the business and business strategy pursued by the local entity including an indication whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediately past year and an explanation of those aspects of such transactions affecting the local entity. Key competitors. 25

26 Which information should be included in the Local File? EU - TPD Information, i.e. description and explanation, on country-specific controlled transactions, including: (i) flows of transactions (tangible and intangible assets, services, financial), (ii) invoice flows, and (i) amounts of transaction flows. OECD - BEPS Controlled transactions For each material category of controlled transactions in which the entity is involved: A description of the material controlled transactions (e.g. procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, licenses of intangibles, etc.) and the context in which such transactions take place. The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e. payments and receipts for products, services, royalties, interest, etc.) broken down by tax jurisdiction of the foreign payor or recipient. An identification of associated enterprises involved in each category of controlled transactions, and the relationship amongst them. A comparability analysis, i.e.: (i) characteristics of property and services, (ii) functional analysis (functions performed, assets used, risks assumed), (iii) contractual terms, (iv) economic circumstances, and (v) specific business strategies. Copies of all material inter-company agreements concluded by the local entity. A detailed comparability and functional analysis of the taxpayer and relevant associated enterprises with respect to each documented category of controlled transactions, including any changescompared to prior years. An explanation of the selection and application of the transfer pricing method(s), i.e. why a specific transfer pricing method was selected and how it was applied. An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting that method. An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection. A summary of the important assumptions made in applying the transfer pricing methodology. If relevant, an explanation of the reasons for performing a multi-year analysis. 26

27 Which information should be included in the Local File? EU - TPD Relevant information on internal and/or external comparables if available; OECD - BEPS A list and description of selected comparable uncontrolled transactions (internal or external), 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. A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transactions, or both. A description of the reasons for concluding that relevant transactions were priced on an arm s length basis based on the application of the selected transfer pricing method. A summary of financial information used in applying the transfer pricing methodology. A copy of existing unilateral and bilateral/ multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions described above. A description of the implementation and application of the group s intercompany transfer pricing policy. Financial information Annual local entity financial accounts for the fiscal year concerned. If audited statements exist they should be supplied and if not, existing unaudited statements should be supplied. Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements. Summary schedules of relevant financial data for comparables used in the analysis and the sources from which that data was obtained. 27

28 Amsterdam Arnhem Brussels Dubai Hong Kong London Luxembourg New York Paris Rotterdam Singapore Tokyo Zurich

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