Executive summary

As part of its project on transfer pricing simplification, the Organization for Economic Cooperation and Development (OECD) released on July 30, 2013, a White Paper on Transfer Pricing Documentation. The document is intended to initiate an international discussion of ways in which compliance with transfer pricing documentation requirements can be made simpler and more straight-forward, while at the same time providing tax authorities with more focused and useful information. The White Paper consists of the following sections:

• Overview of existing guidance and initiatives on transfer pricing documentation
• Purpose of transfer pricing documentation requirements
• A tiered approach to transfer pricing documentation
• Development of a coordinated approach to documentation

The White Paper should also be seen in connection with the work on transfer pricing documentation as identified in the OECD's Action Plan on Base Erosion and Profit Shifting (BEPS) released on July 19, 2013. The Action Plan states that the OECD will "develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that Multinational Enterprises (MNEs) provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries, according to a common template." (For details on the Action Plan, see Tax Alert 2013-1412.) The work reflected in the White Paper is directly relevant to, and will be integrated with, the work on transfer pricing documentation that is identified in the OECD's Action Plan on BEPS.

The OECD has requested interested parties to provide written comments on the White Paper by October 1, 2013. It intends to hold a public consultation on the White Paper and other topics on November 12 — 13, 2013, in Paris, France.

This Alert provides an overview of the White Paper.

Detailed discussion

Overview of existing guidance and initiatives on transfer pricing documentation

The OECD makes several observations regarding the current documentation environment. Significant variations between local transfer pricing documentation rules make it difficult for MNEs to consolidate and streamline compliance practices. The local focus makes it difficult for tax authorities to get a "big picture" view of the MNE's transfer pricing practices and results. This may lead to countries pursuing matters of less importance instead of matters of greater importance or higher risk. Furthermore, the OECD concludes that international efforts to create uniformity in documentation practice have not been particularly effective.

Purpose of transfer pricing documentation requirements

In general terms, the White Paper describes the structure and requirements of existing documentation rules, with a focus on "higher level" information that assists tax administrations in undertaking a transfer pricing risk analysis and in confirming a taxpayer's reasonable efforts to comply with the arm's-length principle.

A tiered approach to transfer pricing documentation

Information that is required for a risk assessment should concern features that may indicate the presence of significant transfer pricing risk. In order to obtain clear information that would allow the tax authority to identify whether risk factors are present, documentation rules should focus on:

• Identification of material, cross-border transactions between associated enterprises
• Identification of recent business restructuring transactions and transfers of intangibles
• Information regarding the levels of corporate debt and interest expense in relevant countries
• Information regarding the MNE's global transfer pricing policies, a description of where important intangibles are held and an identification of the MNE's existing APA and ruling arrangements related to income allocation with various countries
• The taxpayer's explanation of how its material transfer pricing arrangements comply with the arm's-length principle and local transfer pricing rules

With respect to the structure of a global transfer pricing documentation package, the White Paper states that the two-tier structure laid out in the EU documentation guidance has significant potential for simplifying transfer pricing documentation compliance. Under such an approach, information relevant to all countries could be assembled on an MNE-wide basis and could be supplied to any country requesting documentation.

The White Paper discusses the use of local or regional comparables. It indicates that businesses have suggested that permitting the use of a standard set of regional comparables in documentation prepared for countries in the same geographic region would provide substantial simplification. In this respect, the White Paper recognizes that the use of regional comparables in situations where appropriate local comparables are available may not always comport with the obligation to rely on the most reliable comparable information. The White Paper states that a desire for simplifying compliance processes should not go so far as to undermine compliance with the requirement to use the most reliable available information.

Development of a coordinated approach to documentation

The White Paper sets out a "Coordinated Documentation Approach" that follows a two-tier structure consisting of a masterfile and a local file.

The masterfile portion of the documentation would seek to elicit a reasonably complete picture of the global business, financial reporting, debt structure and tax situation of the MNE to enable tax authorities to identify the presence of significant transfer pricing risks. The information in the masterfile can be grouped in five categories: (i) information on the MNE group; (ii) a description of the MNE's business; (iii) information on the MNE's intangibles; (iv) information on the MNE's inter-company financial activities; and (v) information on the MNE's financial and tax positions.

The information to be included in the local file would supplement the masterfile and help meeting the objective of assuring that the taxpayer has complied with the arm's-length principle in its material transfer pricing positions. It should focus on specific transfer pricing analyses related to material transactions taking place between a local country affiliate and associated enterprises in different countries. This would include relevant financial information regarding those specific transactions, a comparability analysis and application of the most appropriate transfer pricing method.

Public consultation

The OECD indicates that it is essential to its work on transfer pricing documentation to obtain input from the business community and from other interested, non-governmental parties. Therefore, the OECD invites public comments on the White Paper in order to launch a global conversation on how transfer pricing documentation rules can be improved, standardized and simplified. The OECD also invites comments on whether additional or other possible mechanisms can be developed for complying with the transfer pricing documentation elements of the BEPS Action Plan.

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