OECD transfer pricing documentation: what a defensible file contains

Documentation is the defence, not the paperwork

Transfer pricing disputes are rarely lost on the economics. They are lost because the file was assembled after the query arrived, using figures that do not tie to the statutory accounts. The OECD three-tier model exists to make the position explainable before anyone asks.

The three tiers

• **Master file** — the group's structure, its intangibles, its financing arrangements and the overall allocation of profit. One document, group-wide.
• **Local file** — the specific related-party transactions of one entity, with the functional analysis, the method selected and the benchmarking that supports the price.
• **Country-by-country report** — revenue, profit, tax paid, employees and assets per jurisdiction, filed by groups above the EUR 750 million threshold and used by authorities to select audit targets.

The tiers must agree. A master file that describes the parent as the entrepreneur and a local file that gives the subsidiary a residual profit is an invitation.

What auditors test first

Authorities start with the functional analysis: who decides, who bears risk, who owns the intangible, and whether the people described in the file actually work there. Substance beats contract wording. A licensing structure with no decision-makers in the licensing entity will be recharacterised regardless of what the agreement says.

They then test the comparables — the search strategy, the rejection criteria and the date of the data. A benchmarking study refreshed once and reused for five years is treated as no study at all.

Methods, briefly

CUP where a genuine external comparable exists; resale price or cost plus for routine distribution and services; TNMM for most operating entities because reliable comparables exist at the net margin level; profit split where both sides own unique intangibles. Choosing TNMM by default and describing it as "most appropriate" without testing the alternatives is a common weakness.

Intercompany services and the low value-adding safe harbour

Management charges attract more adjustments than any other category. The OECD simplified approach allows a 5 per cent mark-up on qualifying low value-adding services with reduced benefit-test evidence, which is worth using where it applies. Where it does not, each charge needs a benefit test showing what the recipient received and would have paid for independently.

Building a file that holds in every country

Local rules layer on top of the OECD guidelines: India requires an accountant's report, the UAE ties documentation to corporate tax filings, Australia adds thin capitalisation and reportable tax positions, and the US penalty protection rules require contemporaneous documentation. We prepare one consistent group narrative and then meet each local requirement from it, so the same facts are in front of every authority.

Practical sequence

Refresh benchmarks annually, close the intercompany agreements before the transactions occur, reconcile the file to the statutory accounts, and keep the master file current as the group adds entities. Documentation prepared during the year costs a fraction of documentation prepared during an audit.