Knowledge Center

  • RSS Feed
  • Contact
  • Print


OECD Provides Guidance on Transfer Pricing Documentation

October 23, 2014

Andrew T. Bostian, ASA

A transfer price is the price for goods, services or intangibles that are sold or transferred between related legal entities within a multinational enterprise. 

Transfer pricing strategies have been employed by multinational companies that shift profits to countries with low corporate tax rates, even though the company may have little or no economic activity in that country. The practice of artificially shifting income into tax-advantaged environments is referred to as base erosion and profit shifting (BEPS).

The Organization for Economic Cooperation and Development (OECD) and G20 countries adopted an Action Plan to address BEPS. The primary objective of the Action Plan is to make certain that profits are taxed in the country where the profits are being generated and where value is created. The Action Plan is broken down into 15 points, of which seven of the deliverables were completed and presented to the finance ministers of the G20 at a meeting held on September 20, 2014 in Cairns, Australia.   

Action 13 of the Action Plan relates to transfer pricing documentation and country-by-country reporting. Tax authorities around the globe have implemented regulations that require subsidiaries within a multinational organization to transact at an arm’s-length price. Many countries have adopted documentation-related penalties that are designed to make non-compliance more costly than compliance. Such penalties are typically monetary penalties. In the United States, the penalty ranges from 20% to 40% of the underpayment of tax, but penalties may be avoided with the presence of proper transfer pricing documentation.

The increase in transfer pricing regulations, along with a rise in volume and complexity of intercompany trade, has resulted in a significant increase in compliance costs for taxpayers. Action 13 provides guidance to tax authorities on how to collaborate and streamline the process of transfer pricing review.

The OECD proposes a three-tiered structure in order to create a standardized approach to transfer pricing documentation, as follows:

  1. Master FileShould contain high-level standardized information regarding the global business operations and transfer pricing policies for all members of the multinational enterprise. The master file is meant to be an outline of a multinational enterprise’s organizational structure, and should also include a description of the company’s business, intangibles, intercompany financial activities and tax positions. Annex I of the guidelines provides a list of information to be included in the master file.
  2. Local File: Should contain more detailed transactional transfer pricing information that identifies (i) relevant related party transactions; (ii) the amounts involved in the intercompany transactions; and (iii) the company’s analysis regarding the arm’s length nature of the intercompany transactions. Annex II of the guidelines provides a list of information to be included in the local file.
  3. Country-by-Country Report: Should contain information relating to the global division of the multinational enterprise’s income and taxes paid together with specific indicators of the location of economic activity within the company. This report is meant to be helpful for high-level transfer pricing risk assessment purposes. Annex III of the guidelines provides a model template for the country-by-country report. 

Before establishing pricing for an intercompany transaction, whether for goods, services or intangibles, taxpayers should first consider whether the transfer pricing is appropriate for tax purposes and should confirm the arm’s length nature of its financial results. Taxpayer documentation should be reviewed annually to determine whether the functions and risks associated with intercompany transactions are still accurate and pertinent. The transfer pricing methodology chosen and applied should also be verified.    

Well-prepared transfer pricing documentation will give the tax authorities some assurances that the taxpayer has methodically analyzed the intercompany transactions, has considered the proper comparable data and has attained reliable transfer pricing positions. 

For more information please contact Andrew Bostian, or 617.658.5232.


State up-to-date with the latest developments regarding transfer pricing:


Andrew Bostian is a manager at BlumShapiro. BlumShapiro is the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation, and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.


Advisors | Auditors | Consultants | CPAs - Blum Shapiro is one of the premier public accounting firms in the northeast and a Top 100 CPA Firm in the U.S. Our professionals serve businesses, individuals and organizations in Boston (MA), Hartford (CT), Cranston (RI), Shelton (CT) ,Quincy (MA) and Newton (MA) with audit, tax and business consulting services. Our firm has developed practice areas in automotive, construction, education, government, healthcare, hospitality, manufacturing, nonprofit organizations and professional service firms. New Haven CT, Fairfield CT, Norwalk CT, Waterbury CT.