The Committee of Fiscal Affairs of the Organization of Economic Cooperation and Development (OECD) has released its proposed updated guidelines on transfer pricing documentation, including country-by-country reporting (CbC), the Discussion Draft on Transfer Pricing Documentation and CbC Reporting.  This Discussion Draft contains a proposed template for multinational reporting of global business information and taxes paid to each country in which the multinational operates.  

The Discussion Draft, released on January 30, 2014, is still a work in progress, with the OECD seeking input from the public on several key issues. The OECD is working to a tight deadline to finalize these guidelines by May and will accept written comments through February 23, 2014.  A public consultation is likely to be held in March.


The Discussion Draft is part of the larger OECD initiative on Base Erosion and Profit Shifting Action Plan  (the BEPS Action Plan) announced in February 2013 to reduce perceived taxpayer double non-taxation, or the presence of corporate income that is untaxed by any country. Concerns over double non-taxation have led to political and public outcry in Europe, the US  and emerging markets.  

In July 2013, the OECD issued a white paper on transfer pricing documentation which outlined ideas for new global standards for the regular compliance exercise required by over 60 countries for multinationals’ intercompany transactions. Included within the scope of documentation in the white paper was a multi-part transfer pricing documentation package to include a “master file report,” local transaction-specific documentation and country-by-country reporting. 

The Discussion Draft proposes specific details of the revised reporting requirements that include listing company-wide data on business activity, financial information and taxes paid in each jurisdiction that would be available to all relevant tax authorities to conduct a transfer pricing risk assessment and to audit intercompany transactions.  Importantly, these new requirements would not replace current documentation standards that require that each transaction be assessed against the arm’s length standard, and therefore will add to the annual compliance burden of multinationals.

The Discussion Draft is written to replace the current Chapter V of the OECD Transfer Pricing Guidelines. Nevertheless, because the Discussion Draft is part of the broader BEPS project, the Discussion Draft indicates that the scope of reporting may be expanded to include reporting of information relevant to other BEPS related concerns (e.g., hybrid entities or hybrid debt payments). 

The Discussion Draft  lists three objectives of transfer pricing documentation:

  • Provide tax authorities with sufficient information to perform a risk assessment
  • Ensure that taxpayers follow arm’s length transfer pricing policies at the time they report income in their returns and
  • Provide tax authorities with sufficient information to conduct a transfer pricing audit, if necessary.

A two-tiered approach

The heart of the Discussion Draft is a recommendation for OECD countries to adopt a two-tiered approach consisting of a standardized “masterfile,” which contains information about all multinational related entities and a local file for each jurisdiction.  The masterfile and local file construct is similar to current transfer pricing reporting requirements in some European countries.  The masterfile is intended to  present “…a reasonably complete picture of the global business, financial reporting, debt structure, tax situation and the allocation of the multinational’s income, economic activity and tax payments…”  (para. 18) to enable tax authorities to assess the presence of transfer pricing risk.  

Appendix I lists the contents of the masterfile:

  • Organizational chart of legal entities
  • Description of each of the business units, including drivers of business profit, supply chain,intercompany service transactions, description of geographic markets, functional analysis of each entity, business restructurings or transactions, and the location of the 25 most highly compensated employees
  • Intangible assets used by the business, including overall R&D strategy and location of facilities and management, ownership and related party agreements involving intangibles, intercompany agreements, description of transfer pricing policies
  • Intercompany financing arrangements, including finance companies, related party and outside lenders, and a description of transfer pricing policies related to financing
  • Financial and tax positions, including consolidate financial statements, and any tax rulings, APA or MAP matters.

Country-by-country template

 Importantly, the masterfile also contains a country-by-country reporting template which requires companies to provide on an entity and country basis revenues, pre-tax income, taxes paid to each country, withholding tax and intercompany payments related to royalties, services fees and interest.  The template also asks for employee headcounts, employees expense and tangible assets by entity, to align business activity with reported income and help to identify potential sources of double non-taxation.

This template is likely to be the most controversial element of the Discussion Draft.  While similar to the current US form 5471/5472, it adds a new depth of complexity to the reporting requirement.  

In its request for comments, the Discussion Draft highlights several open issues in developing a standardized template for all multinationals.  Among these are:

  • Should the maseterfile report and the country-by-country template be filed in each country where local documentation is required or only with the country where the multinational maintains its headquarters?
  • If  the masterfile and country-by-country template are filed with the headquarters country, how should these documents be distributed to other countries?
  • Should the template be prepared on a company-wide or business unit level?
  • Should the entity-level financial data reconcile to the consolidated financials (top down) or the local statutory financials (bottom up)?
  • Should reported taxes be on a cash or due basis by country? 
  • Should the template include transactional data on cross-border payments?

There are several other open issues regarding the new requirements, including:

  • Establishing a minimum threshold for reporting transactions
  • Establishing protocols for the exchange of information among tax authorities
  • Establishing protocols to protect confidentiality of sensitive information.

The Discussion Draft acknowledges that there is no consensus within the working group on all issues. The Discussion Draft also notes that because transfer pricing documentation requirements are part of countries’ domestic legislation or regulations, actions to implement the OECD recommendations will require changes to local law or regulations.

Given the number of issues to resolve, taxpayers can expect further updates before the deadline is reached. After issuing the final report on CbC reporting, the complicated process of incorporating these guidelines into local law will begin.  DLA Piper will be tracking these developments and will provide further insight as these additional guidelines become available.

See the Discussion Draft here.

Ágata Uceda