Transfer Pricing Documentation Localization Guide

November 9, 2023

by Scott Chen

Transfer Pricing Analyst

Although the OECD provides OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”), many countries still have not fully implemented the documentation standard. They also have diverse interpretations of specific TP methodologies or stipulate additional regulations in addition to the standard OECD rules.

Accordingly, no “one-for-all” TP report can legally satisfy all the jurisdictions where the MNEs have TP compliance obligations. Therefore, localizing your TP reports to comply with each local requirement is necessary. Thus, the utmost question we will be discussing in this article is, in what aspects can local TP legislation vary between countries?

1. Addressing TP Methodology Variations

The TP methodology is the first aspect where local-specific TP compliance may deviate from the OECD standard. For example, the OECD Cost Contribution Arrangement (“CCA”) is referred to as a Cost Sharing Arrangement (“CSA”) in the US, with variations in scope and applications.

Another example is the simplified approaches to low value-adding intra-group services (“LVAS”). While the OECD provides guidance, the extent of its application may differ by country. US legislation does not incorporate these OECD guidelines but instead introduces the Services Cost Method (“SCM”), which can be charged out at cost in certain circumstances.

Therefore, it is critically important to ensure that the documentation aligns with local TP methodology variations.

2. Fulfilling TP Content Requirements

Most countries tend to incorporate the recommended TP documentation from OECD Guidelines into their local legislations. However, local tax authorities may have different interpretations and may require additional information in local TP documentation. Here are a few examples:

Industry and market analysis for the taxpayer’s operations (e.g., Egypt, Poland, Taiwan, etc.);
Detailed entity description, including history (e.g., Ethiopia, Jamaica, Malaysia, etc.);
Financial arrangements description between the taxpayer and unrelated parties (e.g., France, Germany, Peru, etc.);
Value chain or value creation analysis (e.g., Guinea, Nigeria, Sri Lanka, etc.);
Segmented financial information (e.g., Argentina, Bosnia and Herzegovina, China, etc.);
Detailed comparables search and reasoning for acceptances/rejections (e.g., Kosovo, Mexico, Uruguay, etc.).

Review of local documentation content requirements is essential to ensure compliance.

3. Preparing Additional TP Compliance Reports and Forms

Some regimes may request specific forms or documents in addition to the standard three-tiered TP documentation. The most common type is the TP forms, which require ownership and related parties’ transaction information.

Sworn statements, which validate the information provided to tax authorities, may also be required concurrently with TP documentation or forms. Such statements are common in Latin America and beyond.

Thus, preparing local-specific TP reports and forms may be equally important as having your local file and master file ready.

4. Considering Administrative Aspects

This aspect includes various administrative details like accepted documentation languages, submission timelines, and penalties for non-compliance. While English is widely accepted, some countries mandate preparation in local languages. Tax jurisdictions may also vary in terms of documentation timelines, thresholds for preparation, and acceptable formats, such as required electronic submissions.

Penalties for non-compliance generally involve financial sanctions, with some jurisdictions imposing severe consequences for deliberate incompliance.

Therefore, checking local administrative aspects of transfer pricing compliance is critical.

Conclusion

In conclusion, despite the OECD TP Guidelines serving as a reference point, the complexity and inconsistency within local regulations mean there is no overall solution that fits all. A solution may involve digitalizing TP compliance to ensure better localization.

How does Aibidia solve the localization problem?

Aibidia’s flagship solution, the Digital TPDoc, allows for the preparation of OECD-compliant local and master files while ensuring adherence to local requirements through flexible features that accommodate necessary data and generate compliant documentation.