DOCUMENTATION 1
OBJECTIVE OF THE REQUIREMENT FOR DOCUMENTATION
The OECD transfer pricing guidelines require several documents to be compiled during several different time periods. The basis for these
documents can be found in chapter 5 of the guidelines. The OECD issued these requirements to provide guidance to taxpayers. By issuing these
requirements the documentation of the taxpayer includes the data that is helpful in showing that their transactions satisfy the ALP and hence in
resolving transfer pricing issues and facilitating tax examinations. Furthermore, the requirements are also helping in providing tax administrations
with the information necessary to conduct an informed transfer pricing risk assessment.
COUNTRY BY COUNTRY REPORT LOCAL FILE
This document provides aggregated financial and tax data by tax This document provides more detailed information relating to specific
jurisdiction to facilitate risk assessments. The report should initially be intercompany transactions and detailed functional analysis. Assures
handed in in the country of rsidence of the ultimate parent, unless compliance with the arm's length principle in material transfer pricing
replacement is appointed or in case of local filing. The tax authorities of positions impacting a specific jurisdiction.
this jurisdiction will take care of further distribution between other tax
authorities. The goal of this document is to give more detailed information on
specific intercompany transactions.
The goal of this document is to give a broad risk-analysis.
MNE with group revenue >750 mio
COMPLIANCE ISSUES
The obligation to provide these documents is costly for entities and
increases the administrative burden.
MASTER FILE Language might in some cases also be an issue.
This document provides a complete picture of the MNE's global
operations, including an analysis of profit drivers, supply chains,
intangibles and financing.
The goal of this document is to give a high-level overview to placee the
group's TP pratices in their global economic, legal, financial and tax
context.
SOURCES IN THE TRANSFER PRICING GUIDELINES
5.5 : The objectives of the documentation requirements
5.18: Master file
5.22: Local file
5.24: Country-by-country report
5.27: Compliance issues regarding documentation requirements
, OECD PILLAR ONE AND TWO 1
OBJECTIVES
Both Pillar One and Pillar Two are a part of BEPS, a project against Base Erosion and Profit Shifting. Pillar One aims to adapt the international tax
income system new business mmodels by amending profit allocation and nexus rules. The objective of Pillar Two is to fight agressive tax planning
and profit shifting to low-tax jurisdictions.
The overall goals of these measures is to grant an appropriate and fairer allocation of taxable income among countries by simplifying tax rules and
reducing compliance costs for cross-border business in order to ensure a minimum taxation level.
APPLICABILITY PILLAR TWO
The rules that follow from Pillar One, Pillar Two and BEFIT apply to MNE's The GloBE rules are a part of pillar two. These rules aim to guarantee a
with revenues higher than 20 billion euros, if they have a presence in the minimum tax to MNEs by levying an additional tax in the case that the
EU. If there is no EU presence for the MNE, only the rules deriving from minimum level of tax has not been met by the MNE. With that, they pay
Pillar One and Two will apply to the MNE, and not the rules that follow a fair share of taxes, regardless of where they operate.
from BEFIT.
It adresses tax competition and prevents profit shifting to low-tax
This difference comes from the fact that BEPS (P1 + P2) was initiated by jurisdictions.
the OECD and BEFIT by the European Commission.
PILLAR ONE EFFECT ON TP RULES
Pillar One consists of two parts, Amount A and Amount B. Amount A is a The TP rules are based on the ALP. Amount A does not use this principle.
new taxing right for market jurisdictions over a share of residual profit The TP rules will have to make space for the Pillar One Rules, in order to
calculated at MNE level. This is thus not based on the ALP but on a avoid double taxation. Also the Amount A and Amount B may introduce
formula. Its goal is to reallocate a portion of residual profits of the MNE deviations to the correct application of TP rules. The application of
to market jurisdictions where their customers are located, regardless of amount A has the potential to shift taxable income from a more
thei MNE's physical presence. profitable market to a less profitable market, merely due to the
consideration of the market factor. This might not accurately reflect
Amount B constitutes a fixed return for certain baseline marketing and the economic reality of the company’s operations in each market.
distribution activities that take place physically in a market jurisdiction,
in line with the ALP. Both Amount A and Amount B might generate phenomena of tax
planning opportunities. In turn this could give rise to related TP issues.
Because pillar one and two and the TP rules are applied separately, this
leads to a possibility of double taxation arising from the interaction
between the determination of the new rules and the traditional
application of the ALP.
, OECD TRANSFER PRICING GUIDELINES/ APPLICATION OF ALP 2
APPLICABILITY OF TP RULES
Transfer pricing rules apply in the case of a cross-border intercompany transaction between two associated enterpresis. These enterprises can be
associated either by legal association or by economic association. In short, it is about either having shared ownership or shared control.
APPLICATION OF THE ARM'S LENGTH PRINCIPLE ACCORDING TO THE OECD (PARA 1.33)
The OECD has proposed its application of the arm's length principles in their TP Guidelines. First one has to do the comparability analysis. After that,
one should select an appropriate and fitting TP Method to apply. The comparability analysis consists of two key aspects:
1. Identify the commercial or financial relations between the associated enterprises and the conditions and economically relevant circumstances
attaching to those relations in order that the controlled transaction is accurately delineated;
2. Compare the conditions and the economically relevant circumstances of the controlled transaction as accurately delineated with the conditions
and the economically relevant circumstances of comparable transactions between independent enterprises.
ACCURATE DELINEATION OF THE TRANSACTION (PARA 3. CHARACTERISTICS PROPERTY/SERVICES (PARA 1.127)
1.36) The differences in specific characteristics of property or services often
The OECD gives 5 relevant comparability factors that need to be account, at least in part, for differences in their value in the open market.
identified in order to accurately delineate the actual transaction. These Characteristics that may be important differ according to the type of
five comparability factors are the following: subject of the transaction.
1. The contractual terms of the transaction
2. A functional analysis Tangible property:
3. The characteristics of property transferred or services provided The physical features of the property
4. The economic circumstances of the parties and of the market in Its quality and reliability
which the parties operate The availability and volume of supply
5. The business strategies pursued by the parties
Provision of services:
The above mentioned information about the economically relevant The nature and extent of the services
characteristics of the actual transaction should be included as part of
the local file. Intangible property:
The form of transaction (licensing or sale)
The type of property (patent, trademark, know-how)
1. TERMS OF THE TRANSACTION (PARA 1.42) The duration and degree of protection
If the transaction is formalised by the associated enterprises through The anticipated benefits from the use of the property
written contractual agreements, these written agreements provide the
starting point for delineating the transactions and how the Depending on the chosen transfer pricing method, this factor must be
responsibilities, risks, and anticipated outcomes arising were intended given more or less weight. The comparability of the characteristics is most
to be divided at the time of entering into the contract. required for the comparable uncontrolled price (CUP) method.
OBJECTIVE OF THE REQUIREMENT FOR DOCUMENTATION
The OECD transfer pricing guidelines require several documents to be compiled during several different time periods. The basis for these
documents can be found in chapter 5 of the guidelines. The OECD issued these requirements to provide guidance to taxpayers. By issuing these
requirements the documentation of the taxpayer includes the data that is helpful in showing that their transactions satisfy the ALP and hence in
resolving transfer pricing issues and facilitating tax examinations. Furthermore, the requirements are also helping in providing tax administrations
with the information necessary to conduct an informed transfer pricing risk assessment.
COUNTRY BY COUNTRY REPORT LOCAL FILE
This document provides aggregated financial and tax data by tax This document provides more detailed information relating to specific
jurisdiction to facilitate risk assessments. The report should initially be intercompany transactions and detailed functional analysis. Assures
handed in in the country of rsidence of the ultimate parent, unless compliance with the arm's length principle in material transfer pricing
replacement is appointed or in case of local filing. The tax authorities of positions impacting a specific jurisdiction.
this jurisdiction will take care of further distribution between other tax
authorities. The goal of this document is to give more detailed information on
specific intercompany transactions.
The goal of this document is to give a broad risk-analysis.
MNE with group revenue >750 mio
COMPLIANCE ISSUES
The obligation to provide these documents is costly for entities and
increases the administrative burden.
MASTER FILE Language might in some cases also be an issue.
This document provides a complete picture of the MNE's global
operations, including an analysis of profit drivers, supply chains,
intangibles and financing.
The goal of this document is to give a high-level overview to placee the
group's TP pratices in their global economic, legal, financial and tax
context.
SOURCES IN THE TRANSFER PRICING GUIDELINES
5.5 : The objectives of the documentation requirements
5.18: Master file
5.22: Local file
5.24: Country-by-country report
5.27: Compliance issues regarding documentation requirements
, OECD PILLAR ONE AND TWO 1
OBJECTIVES
Both Pillar One and Pillar Two are a part of BEPS, a project against Base Erosion and Profit Shifting. Pillar One aims to adapt the international tax
income system new business mmodels by amending profit allocation and nexus rules. The objective of Pillar Two is to fight agressive tax planning
and profit shifting to low-tax jurisdictions.
The overall goals of these measures is to grant an appropriate and fairer allocation of taxable income among countries by simplifying tax rules and
reducing compliance costs for cross-border business in order to ensure a minimum taxation level.
APPLICABILITY PILLAR TWO
The rules that follow from Pillar One, Pillar Two and BEFIT apply to MNE's The GloBE rules are a part of pillar two. These rules aim to guarantee a
with revenues higher than 20 billion euros, if they have a presence in the minimum tax to MNEs by levying an additional tax in the case that the
EU. If there is no EU presence for the MNE, only the rules deriving from minimum level of tax has not been met by the MNE. With that, they pay
Pillar One and Two will apply to the MNE, and not the rules that follow a fair share of taxes, regardless of where they operate.
from BEFIT.
It adresses tax competition and prevents profit shifting to low-tax
This difference comes from the fact that BEPS (P1 + P2) was initiated by jurisdictions.
the OECD and BEFIT by the European Commission.
PILLAR ONE EFFECT ON TP RULES
Pillar One consists of two parts, Amount A and Amount B. Amount A is a The TP rules are based on the ALP. Amount A does not use this principle.
new taxing right for market jurisdictions over a share of residual profit The TP rules will have to make space for the Pillar One Rules, in order to
calculated at MNE level. This is thus not based on the ALP but on a avoid double taxation. Also the Amount A and Amount B may introduce
formula. Its goal is to reallocate a portion of residual profits of the MNE deviations to the correct application of TP rules. The application of
to market jurisdictions where their customers are located, regardless of amount A has the potential to shift taxable income from a more
thei MNE's physical presence. profitable market to a less profitable market, merely due to the
consideration of the market factor. This might not accurately reflect
Amount B constitutes a fixed return for certain baseline marketing and the economic reality of the company’s operations in each market.
distribution activities that take place physically in a market jurisdiction,
in line with the ALP. Both Amount A and Amount B might generate phenomena of tax
planning opportunities. In turn this could give rise to related TP issues.
Because pillar one and two and the TP rules are applied separately, this
leads to a possibility of double taxation arising from the interaction
between the determination of the new rules and the traditional
application of the ALP.
, OECD TRANSFER PRICING GUIDELINES/ APPLICATION OF ALP 2
APPLICABILITY OF TP RULES
Transfer pricing rules apply in the case of a cross-border intercompany transaction between two associated enterpresis. These enterprises can be
associated either by legal association or by economic association. In short, it is about either having shared ownership or shared control.
APPLICATION OF THE ARM'S LENGTH PRINCIPLE ACCORDING TO THE OECD (PARA 1.33)
The OECD has proposed its application of the arm's length principles in their TP Guidelines. First one has to do the comparability analysis. After that,
one should select an appropriate and fitting TP Method to apply. The comparability analysis consists of two key aspects:
1. Identify the commercial or financial relations between the associated enterprises and the conditions and economically relevant circumstances
attaching to those relations in order that the controlled transaction is accurately delineated;
2. Compare the conditions and the economically relevant circumstances of the controlled transaction as accurately delineated with the conditions
and the economically relevant circumstances of comparable transactions between independent enterprises.
ACCURATE DELINEATION OF THE TRANSACTION (PARA 3. CHARACTERISTICS PROPERTY/SERVICES (PARA 1.127)
1.36) The differences in specific characteristics of property or services often
The OECD gives 5 relevant comparability factors that need to be account, at least in part, for differences in their value in the open market.
identified in order to accurately delineate the actual transaction. These Characteristics that may be important differ according to the type of
five comparability factors are the following: subject of the transaction.
1. The contractual terms of the transaction
2. A functional analysis Tangible property:
3. The characteristics of property transferred or services provided The physical features of the property
4. The economic circumstances of the parties and of the market in Its quality and reliability
which the parties operate The availability and volume of supply
5. The business strategies pursued by the parties
Provision of services:
The above mentioned information about the economically relevant The nature and extent of the services
characteristics of the actual transaction should be included as part of
the local file. Intangible property:
The form of transaction (licensing or sale)
The type of property (patent, trademark, know-how)
1. TERMS OF THE TRANSACTION (PARA 1.42) The duration and degree of protection
If the transaction is formalised by the associated enterprises through The anticipated benefits from the use of the property
written contractual agreements, these written agreements provide the
starting point for delineating the transactions and how the Depending on the chosen transfer pricing method, this factor must be
responsibilities, risks, and anticipated outcomes arising were intended given more or less weight. The comparability of the characteristics is most
to be divided at the time of entering into the contract. required for the comparable uncontrolled price (CUP) method.
