Attorney Barbara Mantegani raises the alarm on how U.S. multinational enterprises should comply with the OECD’s new master file requirements. In this article, Mantegani concludes that because there are significant differences between the U.S. rules and the revised OECD transfer pricing guidelines, companies should approach the master file differently than they have approached U.S. documentation in the past. They need to tell their entire global story in their master file documentation.


Since the mid-1990s, when the U.S. revised the IRC section 482 regulations governing intercompany transactions and imposed specific transfer pricing documentation requirements on U.S. multinationals, and the Organization for Economic Cooperation and Development also issued transfer pricing guidelines that acknowledged the value of transfer pricing documentation, many countries have followed the U.S. example and established country specific documentation requirements. As a result, large multinational enterprises have grappled with how to meet the increasingly diverse expectations of an increasing number of tax authorities.

Until the culmination of the base erosion and profit shifting (BEPS) project, the OECD guidelines did not recommend any specific documentation, but instead generally discussed the type of information that could be relevant to a transfer pricing enquiry, noting that tax administrations should limit the amount of information required to be submitted with the tax return. (See Chapter 5 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2010).)

With the Oct. 2015 final report on BEPS Action Item 13, the OECD finally set forth prescriptive rules that identify three specific types of documents that the organization states will ‘‘help meet the objective of providing tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide informa- tion to commence and target audit enquiries.’’

In July 2017, the OECD updated its transfer pricing guidelines to incorporate the specific recommendations of the BEPS project, including the Action Item 13 recommendations. (See Paras. 5.C 1-3, of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017.)

Comparing the U.S. rules with the revised OECD guidelines, particularly the master file, one can see that their differences are not just in form, but in the apparent purpose underlying the rules themselves, and therefore multinationals are well advised to approach the master file differently than they have approached U.S. documentation in the past.

U.S. Rules

The U.S. documentation rules—effective in February 1996—were imposed in conjunction with a complete overhaul of the substantive regulations issued under section 482 to govern the pricing of intercompany transactions.


By Barbara J. Mantegani*

As taxpayers around the globe begin filing country- by-country reports based on the notorious CbCR template developed in Action Item 13 of the Base Erosion and Profit Shifting project, and countries prepare to exchange their 2016 reports, the big question is ‘‘What next?’’ Will countries that get the CbCR just start running numbers and issuing audit adjustments, as taxpayers have feared since the CbCR template was first released? Will the IRS establish new audit ‘‘campaigns’’ around the information it receives in the CbCR? At the end of the day, what impact will the CbCR information have on a country’s audit procedures and audit adjustments?

The Organization for Economic Cooperation and Development, led by the work of the Canada Revenue Agency, begins to answer that question with a thorough, thoughtful country-by-country reporting hand- book (‘‘the Handbook’’)1 reiterating that the onus is now on the tax administrations to make effective ‘‘and appropriate’’ use of the information contained in the CbCR.

The Handbook is a practical guide to both tax authorities and taxpayers, in that it:

  • explores the framework of tax risk assessment used by tax authorities in several of the countries that participated in the BEPS project;
  • identifies tax risk indicators that can be detected specifically by using a CbCR;
  • identifies challenges to the effective use of CbCR information in tax risk assessment;
  • identifies other information sources that might be used in conjunction with the CbCR to perform tax risk assessment; and
  • includes a comprehensive example that demonstrates how the information from a CbCR might properly be used as part of a country’s tax risk assessment framework.

The Handbook shows that CbCR can be an important tool for tax authorities, for the identification of transfer pricing and other BEPS-related risk, when used alongside other information the tax authority holds, or as the basis for further inquiries. It also raises cautions about the risk that ‘‘simplistic and misleading conclusions’’ may be drawn if the CbCR is used in isolation, but expresses the hope that it will provide ‘‘valuable support to countries introducing CbC Reporting and using the information they receive.’’ The Handbook will be updated periodically so that tax authorities in all countries can benefit from each other’s experiences, and taxpayers can be apprised as audit practices develop and change.

The Handbook identifies three broad scenarios that can suggest the existence of transfer pricing risk:

  1. Where a group has recurring transactions with related parties that have the potential to erode a jurisdiction’s tax base over time, e.g., where there are large intragroup payments that can be hard to value — such as interest, service fees, management fees, and royalties;
  2. Where a company has undergone a major business restructuring or has transferred valuable income-producing assets, leading to one-off transactions; and
  3. Where a group does not have effective tax governance processes in place to manage the pricing of related-party transactions on an ongoing basis.

Of those three scenarios, the CbCR contains data that can assist tax authorities in risk assessment for the first two (i.e., the recurring hard-to-value transactions and the one-off transactions) with the other elements of transfer pricing documentation (i.e., master file, local file, transfer pricing questionnaires, and the like), providing information relevant to determining risk factors arising from an entity’s tax controls and governance processes (or lack thereof).

Tax risk assessment is a key element of modern tax administration, in that it allows tax authorities to identify factors which, if present in a taxpayer’s profile, suggest either an increased or a reduced risk of noncompliance with the country’s tax laws. Tax authorities continue to grapple with limited resources, and while much tax risk assessment continues to have a manual element, tax authorities increasingly look at incorporating automated methods for risk assessment into their audit processes. Automated risk assessment tools can be used to identify both higher risk taxpayers and higher risk arrangements, which can then be flagged for further review regardless of the taxpayer’s overall risk profile.

With the addition of the CbCR to the list of transfer pricing documentation that taxpayers must submit with their tax returns, tax authorities now have information provided in a format (primarily numerical data — e.g., revenues (allocated between related party and unrelated party), value of assets, tax amounts, number of employees) that lends itself to the development of formulas and algorithms that can be used to compare the taxpayer’s results across countries and size and type of affiliates. Requiring taxpayers to list all constituent entities in each jurisdiction and identify the functions of each entity allows tax authorities to do apples-to-apples comparisons of the financial and tax results between and among countries with similar functional profiles.

Washington, DC.  

In 2015 the OECD released the final report on Action Item 13 – Transfer Pricing Documentation and Country-by-Country Reporting, which proposed a new documentation scheme that included the preparation of: 1) a master file; 2) local files; and 3) a document called a “country-by-country report,” (“CbCR”) the last of which was unlike any report or filing regarding transfer pricing that had ever previously been proposed. Perhaps not surprisingly, all heads turned to the CbCR, with its request for country-level data on revenue, headcount, functions, and most uncomfortably, taxes paid and accrued, from MNEs with at least €750 million in annual consolidated revenue.

Many hands were wrung and ink spilled while countries and commentators alike pondered to what nefarious use such reports could be put, since the recommendations included an exchange mechanism, intended to be automatic, to allow the sharing of a CBCR prepared in the MNE’s home country with tax authorities in all the other countries where the MNE does business. At the time, very little attention was paid to the first two items on the list, since they kinda sorta sounded like the documentation that MNEs were already preparing, and besides, HEADCOUNT!

As the country-level implementation of the recommendations began, it was clear that most of the OECD/G20 countries that participated in the BEPS project (and other interested country observers) fully supported both the CbCR and the exchange mechanism, and more than 50 countries signed on to a Multilateral Competent Authority Agreement for CbCR (“MCAA for CbCR”) that would allow the automatic exchange of reports with all other signatories.

The United States, (which could not sign the MCAA for CbCR for reasons discussed in an earlier blog post), has worked on a nearly identical bilateral agreement, which as of this writing has been signed by 17 U.S. treaty or TIEA partners, including a number of European treaty partners (Netherlands, Belgium, Denmark and Ireland), Brazil (through a TIEA) and Canada. The Treasury Department has stated that it expects to have agreements signed with a substantial number of the larger treaty partners before the automatic exchanges begin during the first half of 2018. So for better or for worse, it appears that the CbCR will become a part of the transfer pricing documentation package of all large MNEs.