Introduction
In response to rising concerns about base erosion and profit shifting (BEPS), the OECD introduced a standardized three-tiered documentation approach under Action 13 of the BEPS Action Plan. This documentation framework ensures that tax authorities have sufficient information to assess the transfer pricing risks and tax positions of multinational enterprises (MNEs).
Overview of the Three Tiers
Master File
Provides a high-level overview of the MNE group’s global business operations and transfer pricing policies.
Includes details such as organizational structure, description of business activities, intangibles, intercompany financial activities, and financial/TP positions.
Local File
Contains detailed information specific to the local entity’s intercompany transactions.
Must include a description of controlled transactions, entity’s management structure, FAR analysis, selection and application of transfer pricing methods, and economic analyses.
Country-by-Country Report (CbCR)
Provides aggregate tax jurisdiction-wise data on the global allocation of income, taxes paid, and certain indicators of economic activity.
Typically required for MNE groups with consolidated group revenue exceeding €750 million.
Implementation Across Jurisdictions
The three-tiered documentation requirement has been implemented in numerous countries including India, the UK, the USA, and EU member states. While the general structure remains consistent, the thresholds, filing timelines, and formats may vary.
India’s Perspective
India has fully adopted the Master File and CbCR requirements under its Income Tax Rules.
Specific forms (Form 3CEAA and 3CEAB for Master File, Form 3CEAD for CbCR) must be filed.
Thresholds: Consolidated group revenue of INR 5,000 crore for CbCR; INR 500 crore for Master File Part A; INR 50 crore for Master File Part B.
Benefits of Compliance
Enhances transparency and tax compliance
Reduces the risk of audits and penalties
Helps MNEs proactively assess and manage their global TP risks
Challenges and Best Practices
Gathering and aligning data across jurisdictions
Ensuring consistency between Master File, Local File, and CbCR
Timely preparation and filing
Using technology platforms to automate data collection and reporting
Conclusion
The OECD’s three-tiered documentation approach is a critical compliance requirement for MNEs operating in multiple countries. A proactive and consistent documentation strategy not only ensures compliance but also strengthens the MNE’s position in potential audits or disputes.
