Creating a Local File in Transfer Pricing Documentation

This article leads off the article: Essential Components of Transfer Pricing Documentation.

Transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation has become a critical compliance aspect for multinational and medium-sized enterprises. One of the key components of this documentation is the local file, which provides detailed information on the related party transactions of a specific entity within a particular country.

The transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... local file is an essential part of the three-tiered approach to transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation recommended by the Organisation for Economic Co-operation and DevelopmentThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... (OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve...). It complements the master file, which provides an overview of the multinational group’s operations, and the country-by-country report, which outlines the group’s financial and economic activities across different jurisdictions.

Key Aspects of a Transfer Pricing Local File

1. Local Entity’s Organizational Structure

The local file should begin with a clear organizational structure of the local entity. This includes:

• A chart illustrating the local entity’s legal and ownership structure.
• Description of management structure and key personnel.

Example: A local manufacturing subsidiary in Germany might include a detailed chart showing its place within the larger MNEWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... structure, including key managers and reporting lines.

2. Detailed Description of Local Business Activities

This section should provide a detailed description of the local entity’s business activities. It includes:

• Functions performed by the local entity.
• Assets used by the local entity.
• Risks assumed by the local entity.
• Overview of the industry and market conditions.

Example: A local subsidiary of a pharmaceutical company might describe its specific R&D activities, the assets it utilizes (e.g., laboratory equipment), and the risks it undertakes (e.g., clinical trial failures).

3. Information on Controlled Transactions

Detailing controlled transactions is crucial for transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation. This includes:

• Description of material intercompany transactionsIntra-Group Transactions are interactions between entities within the same multinational enterprise (MNE). Such transactions form the backbone of related-party dealings and are essential in managing global operations and aligning business objectives across jurisdictions. Understanding intra-group transactions is critical in international tax and transfer pricing, as they directly impact a company's tax obligations, profitability, and compliance standing. Tax professionals, accountants, lawyers,....
• Amounts involved in these transactions.
• Counterparties involved in these transactions.
• Transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... methods applied.

Example: A local subsidiary might list its purchases of raw materials from the parent company, the amounts paid, and the transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... method used to determine the transaction price.

4. Transfer Pricing Policies and Agreements

This section outlines the local entity’s transfer pricing policiesTransfer Pricing Policies refer to the rules and methods established by multinational enterprises (MNEs) to determine the pricing of transactions between related parties, such as subsidiaries or divisions of the same company. These transactions may involve the transfer of goods, services, intellectual property, or financial arrangements. Transfer pricing policies are essential for ensuring that intercompany transactions adhere to the arm’s... and any relevant agreements. It should cover:

• Copies of intercompany agreementsIntercompany Agreements (ICAs) are legally binding contracts between two or more entities within the same corporate group. These agreements outline the terms and conditions of transactions such as the sale of goods, provision of services, use of intellectual property, or intercompany financing. ICAs are crucial for managing transfer pricing compliance, mitigating tax risk, and demonstrating that intercompany transactions are conducted....
• Details of pricing policies for intercompany transactionsIntra-Group Transactions are interactions between entities within the same multinational enterprise (MNE). Such transactions form the backbone of related-party dealings and are essential in managing global operations and aligning business objectives across jurisdictions. Understanding intra-group transactions is critical in international tax and transfer pricing, as they directly impact a company's tax obligations, profitability, and compliance standing. Tax professionals, accountants, lawyers,....
• Economic analysis supporting the pricing policies.

Example: A local subsidiary might provide copies of service agreements with the parent company, along with a description of the cost-plus methodThe Cost-Plus Method is one of the five primary transfer pricing methods outlined by the OECD Transfer Pricing Guidelines. It is used to determine the arm's length price of intercompany transactions, particularly for services or products provided between associated enterprises. The method applies a standard markup to the costs incurred by the supplier, ensuring that the resulting profit margin reflects... used to price these services.

5. Financial Information

The final section should present the local entity’s financial information, including:

• Financial statements for the fiscal year.
• Schedule of related party payments and receipts.
• Any relevant financial information to support the transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... analysis.

Example: A local subsidiary might include its annual financial statements and a detailed schedule of payments made to related parties for services rendered.

6. Understand the Local Guidelines

It is important to note that while the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... guidelines provide a general framework, local tax authorities may have specific requirements or variations in their transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation rules. Therefore, it is crucial to consult the relevant local regulations and ensure compliance with the specific requirements of each jurisdiction.

Formatting and Presentation:

While there is no prescribed format for the local file, it is essential to present the information in a clear, organized, and easily accessible manner. Here are some best practices for formatting and presenting the local file:

1. Use a logical structure: Organize the local file into sections and subsections, following a consistent and logical flow. This will make it easier for tax authorities to navigate and understand the information provided.
2. Employ clear headings and subheadings: Utilize descriptive headings and subheadings to guide the reader through the different sections and topics covered in the local file.
3. Incorporate visual aids: Consider including tables, charts, diagrams, and other visual aids to present complex information in a more accessible and understandable format.
4. Provide cross-references: Where relevant, cross-reference information from other parts of the transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation, such as the master file or supporting documents, to avoid duplication and ensure consistency.
5. Use consistent terminology: Maintain consistency in the use of terminology throughout the local file, aligning with the definitions and terminology used in the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... guidelines and local regulations.
6. Ensure proper indexing and pagination: Include a table of contents, proper indexing, and clear pagination to facilitate easy navigation and reference within the local file.

Compliance and Best Practices:

In addition to the content and formatting requirements, there are several best practices to consider when creating a local file for transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation:

1. Contemporaneous documentation: Prepare the local file contemporaneously with the controlled transactions, ensuring that the information and analysis reflect the actual circumstances and decisions made at the time of the transactions.
2. Regular updates: Review and update the local file annually or whenever there are significant changes in the business operations, transactions, or economic circumstances that may impact the transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... analysis.
3. Involve relevant stakeholders: Collaborate with various departments and stakeholders within the organization, such as finance, operations, and legal, to gather accurate and comprehensive information for the local file.
4. Maintain supporting documentation: Retain and organize all relevant supporting documentation, such as contracts, agreements, financial data, and comparables analyses, to substantiate the information provided in the local file.
5. Conduct risk assessments: Perform regular risk assessments to identify potential areas of non-compliance or exposure, and address them proactively in the local file.
6. Seek professional advice: Consider consulting with transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... experts, such as firms like TRM (www.taxriskmanagement.com), to ensure compliance with local regulations, provide guidance on best practices, and mitigate potential risks.

In Closing

Creating a comprehensive and compliant local file is a critical aspect of transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation for multinational organizationsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... and medium-sized enterprises. By following best practices, such as adhering to the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... guidelines, maintaining a logical structure, ensuring clear presentation, and involving relevant stakeholders, tax professionals can effectively communicate the arm’s length nature of their related party transactions to tax authorities.

However, transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... regulations can be complex and vary across jurisdictions. Consulting with experienced transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... professionals can provide valuable guidance and expertise to navigate the intricacies of local requirements, mitigate risks, and ensure compliance with the ever-evolving transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... landscape.

References:

1. OECD Transfer Pricing GuidelinesThe OECD Transfer Pricing Guidelines serve as a critical framework for multinational enterprises (MNEs) and tax administrations worldwide. They provide detailed principles for the pricing of intra-group transactions to ensure that profits are allocated fairly across jurisdictions, based on the arm’s length principle. In essence, these Guidelines are instrumental in preventing tax base erosion and profit shifting by MNEs. The... for Multinational EnterprisesWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... and Tax Administrations (https://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm)
2. Aibidia, “Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Documentation Localization Guide” (https://aibidia.com/resources/transfer-pricing-documentation-localization-guide)
3. Valentiam Group, “Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Documentation: 5 Best Practices To Follow” (https://www.valentiam.com/newsandinsights/transfer-pricing-documentation)
4. Deloitte, “Transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation and country-by-country reporting” (https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-beps-changes-transfer-pricing-documentation-and-country-by-country-reporting.pdf)
5. Aibidia, “How to Prepare a Local File in 60 Minutes” (https://aibidia.com/resources/how-to-prepare-a-local-file-in-60-minutes)
6. Quantera Global, “Transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... local file” (https://www.quanteraglobal.com/services/transfer-pricing-local-file/)
7. Baker McKenzie, “Template_Local File Transfer Pricing” (https://insightplus.bakermckenzie.com/bm/attachment_dw.action?attdocparam=pB7HEsg%2FZ312Bk8OIuOIH1c%2BY4beLEAe8ulxTwyJ%2FUk%3D&attkey=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQJsWJiCH2WAXW59W9rh3JQVKYHPE%2FMAI5&fromContentView=1&nav=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQbuwypnpZjc4%3D)
8. OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve..., “Draft Toolkit on Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Documentation” (https://www.oecd.org/tax/beps/draft-toolkit-transfer-pricing-documentation-platform-for-collaboration-on-tax.pdf)
9. PwC, “The requirements for the Local file and the information to be contained therein” (https://www.pwc.com/lv/en/about/services/Tax/transferpricing/Local%20file%20and%20the%20information%20contained%20therein%20ENG_1.pdf)
10. Kluwer International Tax Blog, “Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Documentation: What a Local File Could Look Like” (https://kluwertaxblog.com/2019/07/24/transfer-pricing-documentation-what-a-local-file-could-look-like/)
11. TaxCoach, “Transactions with related entities – transfer prices” (https://taxcoach.pl/en/blog/others/transactions-with-related-entities-transfer-prices.html)
12. EY, “How is technology transforming transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... benefits documentation” (https://www.ey.com/en_in/tax/how-is-technology-transforming-transfer-pricing-benefits-documentation)
13. PwC, “Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Consulting” (https://www.pwc.de/en/steuern/transfer-pricing.html)