OECD - The New Transfer Pricing Landscape

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On September 16, 2014, the Organisation for Economic Co-operation and Development (OECD) released its first set of reports and recommendations as part of its Base Erosion and Profit Shifting (BEPS) Action Plan. The OECD established the Action Plan in 2013 at the request of the G20 to respond to growing international concern regarding BEPS and to address the perceived artificial shifting of profits by multinational enterprises (MNEs) to tax-favourable jurisdictions.

The Action Plan contains 15 actions to be undertaken over a 2-year period with the goal of improving the coherence, substance and transparency of the international tax system. ‎The September release addresses 7 of these actions, including new guidance on transfer pricing documentation (Action 13), which includes the much-publicized country-by-country (CbC) reporting template.

New documentation guidance

The report released on Action 13 contains revised standards for transfer pricing documentation and a template for CbC reporting, both of which are now included in the OECD Transfer Pricing Guidelines. The new guidance is aimed at improving transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments, and at improving the consistency of requirements for taxpayers.

The revised guidance suggests a 3-tiered structure for the documentation consisting of a master file, a local file and a CbC report.

Master file

The master file prepared by the MNE group’s parent company should provide an overview of the group’s business, overall transfer pricing policies and global allocation of income and economic activity. The master file is intended to be available to all relevant country tax administrations.

The proposed master file differs from typical current documentation standards: it has a global scope and should provide a global overview. A description of the supply chain for the MNE’s largest products and/or service offerings will have to be included. Important transactions with respect to intangibles, financial transactions and business restructurings must also be listed. Finally, the master file should contain a list and brief description of the MNE’s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries.

Local File

The local file will provide detailed information relating to specific material intercompany transactions. It should supplement the master file and help in assessing whether the taxpayer has complied with the arm’s-length principle in a specific jurisdiction. Such information would include relevant financial information regarding specific transactions, a comparability analysis and the selection and application of the most appropriate transfer pricing method.

Like the new rules for the master file, the guidance for the local file contains deviations from current documentation standards. First, the local file will have to include financial information and allocation schedules to show how the financial data used in applying the transfer pricing method may be tied to the annual financial statements. Furthermore, the local file should contain 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 company will need to be able to support that both the transfer pricing policy and the actual results are at arm’s length.

Various types of agreements will have to be reported, including all material intercompany agreements concluded by the local entity and copies of existing APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions involving the local entity.

Country-by-Country reporting

The CbC report is an entirely new reporting requirement. In contrast to what the OECD had originally suggested, the CbC report is to be kept separate from the master file.

The ultimate parent of an MNE group will be required to complete a template reporting the allocation of the group’s income, taxes and business activities. More specifically, this template requires the MNEs to report, on a tax jurisdiction basis, the following:

  • Revenues (from related and unrelated party transactions)
  • Profit (loss) before income tax
  • Income tax paid (on a cash basis) 
  • Income tax accrued (current year)
  • Stated capital 
  • Accumulated earnings
  • Number of employees
  • Tangible assets other than cash and cash equivalents

In addition, the CbC report would require MNEs to annually provide the list of resident entities in each tax jurisdiction, their tax jurisdiction of organization or incorporation and their main business activities.


The OECD has finalized its guidance on the content of the master file, local file and CbC report. However, the filing process of the master file and the CbC report, and the mechanism by which the information in these reports is to be made available to the tax administrations in relevant countries, have not yet been finalized. The OECD will address these implementation issues over the next few months, and guidance is expected in early 2015.

While it’s still not clear how and when countries, including Canada, will implement the new guidance, it is clear that it will represent a significant change for MNEs with regard to their approach to the preparation of transfer pricing documentation. Companies should closely monitor the development of the OECD’s recommendations on implementation approaches for these new reporting requirements and developments with respect to the adoption of the new reporting requirements in the countries in which they operate.


When implemented, the new transfer pricing documentation guidelines will significantly increase the level of disclosure and transparency required of MNEs, and may put pressure on the tax structures of some. This will particularly be the case for MNEs whose global tax footprint is significantly different from, or misaligned with, their operational footprint.

Documentation is the first line of defence in transfer pricing audits. Companies will have to take the necessary steps to ensure they can produce the required information, including gathering the information and developing internal processes and responsibilities with regard to the new reporting, in particular the CbC report.

MNEs should take advantage of the time before various countries implement this new guidance to refresh their global transfer pricing strategies and develop a comprehensive plan for preparing documentation under the revised guidance.

On behalf of the Technical working group on taxation and commodity taxes of the Quebec CPA Order

Alfred Zorzi, CPA, CA
Partner, Transfer Pricing Services
Ernst & Young LLP