Transfer-Pricing Documentation: Possible Relief Ahead for Small Multinational Companies

By Laura Clauser, Ph.D., Washington, D.C.

Editor: Greg A. Fairbanks, J.D., LL.M.

Tax Accounting

On Nov. 12–13 in Paris, the Organisation for Economic Co-operation and Development (OECD) opened its proceedings to the public to discuss transforming transfer-pricing documentation requirements globally. The momentum among OECD members is driven by two concerns: (1) a view among tax authorities that most transfer-pricing documents do not include useful information, and (2) a perception among multinational companies that current requirements are costly and unnecessarily burdensome.

The proceedings allowed members of Working Party No. 6, a working group of the OECD’s Committee on Fiscal Affairs, to obtain comments from the international business community on a White Paper on Transfer Pricing Documentation that the OECD published in July 2013. This white paper surveyed current documentation requirements across countries, suggested objectives for future requirements, and offered a proposal for harmonizing such requirements globally.

During the proceedings, members of the working group announced plans to finalize new guidance on transfer-pricing documentation in September 2014. Unless members diverge from the course outlined in the white paper, such guidance should offer cost savings to multinational companies, particularly small and compliant ones.

Needles in a Haystack and Steadily Increasing Compliance Costs

Current efforts by Working Party No. 6 are driven by tax authorities who cannot conclude from current studies that companies understand and correctly implement transfer-pricing rules. Specifically, they do not see evidence that taxpayers understand the arm’s-length principle—a concept that cross-border transactions between affiliates of a multinational company should be priced as if the transactions had occurred in the marketplace between independent companies. Tax authorities also look for evidence that taxpayers have applied the arm’s-length principle reliably to all material intercompany transactions. During the public proceedings, tax authorities hinted that some taxpayers’ studies bury aggressive transfer-pricing practices in a haystack of paper.

The working group also hopes to reduce burdens on compliant multinational companies. Over the past 20 years, countries around the globe have adopted transfer-pricing documentation requirements. Unfortunately, these requirements differ significantly in nature, content, and timing, increasing costs unnecessarily for multinational companies.

Consensus on a Common Objective of Transfer -Pricing Documentation

In an effort to develop a coordinated approach to transfer-pricing documentation that might be acceptable to governments around the globe, the working group aims to first develop consensus among its members on the purpose of such documentation. At the public hearing, the secretariat hinted that the primary objective might be to illustrate to tax authorities that taxpayers understand and reliably apply the arm’s-length principle. By preparing documentation, companies are required to articulate solid, consistent, and cogent transfer-pricing positions for their cross-border intercompany transactions.

Suggestions for a Coordinated Approach

Assessing transfer-pricing risk: A globally coordinated approach to transfer-pricing documentation would need to focus on information that tax administrators need to identify compliance risk and determine whether to initiate an audit. The white paper notes that an earlier OECD publication had identified features that may indicate the presence of significant transfer-pricing risk, including:

  • Transactions with, and income allocated to, affiliates in low-tax jurisdictions;
  • Transfers of intangible assets to affiliates;
  • Business restructurings;
  • The existence of specific types of related-party payments that have the potential to erode the tax base, including intercompany interest, insurance premium, and royalty payments;
  • Successive years of losses;
  • Poor or nonexistent transfer-pricing documentation; and
  • Excessive debt.

A two-tiered approach: The white paper also suggests a possible two-tiered approach to future documentation studies. The first tier is a master file document that is intended to minimize compliance costs for compliant companies and provide tax authorities with information necessary to assess transfer pricing. Compliance costs should decrease because a master file eliminates duplication across countries. A master file also aids tax authorities because it contains information about a company’s global business that is of interest to all governments. For example, the working party advises companies to consider and address the following factors in their master files:

  • An overview of the multinational business’s ownership, geographical location of principal entities, and management structure and location of key management personnel;
  • A description of the business’s major business line, including its drivers of profit, supply chains, important related-party service arrangements, main markets, key competitors, and major restructurings in the previous five years;
  • A description of intangibles, including strategy for their development, location of principal research and development facilities and their management, major related-party agreements, and transfers of interests in the applicable year;
  • Intercompany financial activities, including material loans and guarantees; and
  • Financial statements by country and tax documents, including applicable advance-pricing agreements.

Although listed last, country-by-country reporting may become a new weapon in the arsenals of tax authorities. Noncompliant, multinational companies currently sweep evidence of profit shifting from high-tax to low-tax countries by hiding behind current international accounting standards that permit such companies to report aggregate results (e.g., global profits, tax payments, and borrowings). Country-by-country reporting would disaggregate those results and improve transparency for tax authorities.

The second tier of the proposed approach is local country documentation. In this step, the working group recommends that taxpayers identify all material intercompany transactions involving local companies and foreign affiliates. Next, taxpayers are encouraged to analyze any of these transactions that exceed a materiality threshold in a manner that is consistent with local country rules.

Potential Relief

If adopted, a two-tiered approach might benefit small or compliant multinational companies. Small multinational companies with cross-border transactions that fall beneath materiality thresholds would benefit because they would be exempt from transfer-pricing documentation requirements. Large, compliant multinational companies that incorporate evidence of low to no transfer-pricing risk in their transfer-pricing studies would also benefit by avoiding duplication in documentation and costly audits.


Greg Fairbanks is a tax senior manager with Grant Thornton LLP in Washington, D.C.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.

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