Transfer pricing documentation is one of the fundamental pillars of tax compliance for multinational groups. As part of the BEPS (Base Erosion and Profit Shifting) project promoted by the OECD and the G20, a three-tier documentation standard was established —Local Report, Master Report, and Country-by-Country Report (CbCR)— with the aim of providing tax administrations with sufficient, consistent, and comparable information to assess the risks associated with transactions between related parties.
Although these three instruments are part of the same documentation system, their purpose, scope, content, and recipients are substantially different. Understanding their differences is not only key to ensuring regulatory compliance, but also to mitigating the risks of audits, tax adjustments, and significant penalties.
What is the three-tier documentation framework and why does it exist?
The three-tier documentation framework arose in response to the need for greater international tax transparency in the face of increasingly complex and highly integrated global business structures.
Before BEPS, many tax administrations only had fragmented and local information, which made it difficult to:
- Identify the actual creation of value within the group.
- Detect tax base erosion practices.
- Properly analyze transfer pricing risks.
Action 13 of the OECD’s BEPS Plan introduces this three-part approach with a clear logic:
- The Local Report allows for the analysis of specific operations in each jurisdiction.
- The Master Report provides an overview of the multinational group.
- The Country-by-Country Report provides a quantitative snapshot of the global distribution of income, taxes, and economic activity.
Who is required to file each document?
Obligations vary according to each country’s regulations, but they follow common patterns:
- Local Report: Mandatory for local entities that carry out transactions with related parties, provided they exceed certain thresholds defined by domestic legislation.
- Master Report: Generally required of entities that are part of multinational groups whose consolidated revenues exceed a certain threshold (often EUR 750 million, although this may vary).
- Country-by-Country Report (CbCR): Mandatory for multinational groups when consolidated revenues exceed the threshold established by the OECD (EUR 750 million), and is usually filed by the ultimate controlling entity or, in certain cases, by a substitute entity.
When and to whom are these documents submitted?
- Local Report and Master Report They must normally be available at the end of the fiscal year and submitted:
- Together with the income tax return, or
- At the request of the tax authorities during an audit.
- CbCR It is filed annually, generally within 12 months after the end of the fiscal year, with the tax authorities of the country of residence of the obligated entity, which automatically exchanges this information with other jurisdictions.
Local Report: detailed analysis of related-party transactions
The Local Report is the most technical and specific document. Its purpose is to demonstrate that transactions carried out by the local entity with related parties comply with the arm’s length principle.
Typical content of the Local Report
- Description of the local company and its economic environment.
- Functional analysis (functions, assets, and risks).
- Identification and characterization of related-party transactions.
- Selection and application of the most appropriate transfer pricing method.
- Comparability analysis and selection of comparables.
- Financial results and conclusions.
Key approach
The Local Report answers the tax authority’s central question: Is the price agreed between related parties equivalent to that which would have been agreed between independent parties under comparable conditions?
Master Report: strategic and global vision of the multinational group
The Master Report provides a macro view of the multinational group, allowing tax administrations to understand how the business is organized globally and where economic value is generated.
Information contained in the Master Report
- Organizational and legal structure of the group.
- Description of the global business and value chain.
- General transfer pricing policies.
- Information on relevant intangibles (ownership, development, and exploitation).
- Intragroup financing policies.
- Consolidated financial and tax position.
Strategic importance
The Master Report allows you to:
- Assess the consistency between local results and global strategy.
- Identify risks of aggressive tax planning.
- Compare the information in the Local Report with the reality of the group.
Country-by-Country Report (CbCR): global quantitative transparency
The Country-by-Country Report (CbCR) is essentially a quantitative report, designed as a risk assessment tool, not as a direct adjustment instrument.
Information reported by jurisdiction
- Total revenue (related and unrelated).
- Profit or loss before taxes.
- Income tax paid and accrued.
- Declared capital.
- Number of employees.
- Tangible assets.
- List of group entities and their main activity.
Main purpose
The CbCR allows tax authorities to:
- Detect misalignments between revenue, profits, and taxes.
- Identify high tax risk jurisdictions.
- Prioritize audits and inspections.
Main differences between Local Reporting, Master Reporting, and Country-by-Country Reporting
| Aspect | Local File | Master File | CbCR |
| Scope | Local | Global | Global |
| Level of detail | High | Medium | Aggregated |
| Focus | Specific transactions | Strategy and value chain | Tax risk |
| Nature | Qualitative and quantitative | Mainly qualitative | Quantitative |
| Intended recipient | Local tax authority | Tax authorities | Tax authorities (automatic exchange of information) |
How do these documents relate to each other?
The value of the BEPS framework does not lie in each document in isolation, but in their overall consistency:
- The Local Report must be consistent with the policies described in the Master Report.
- Local financial results must be consistent with the information in the Country-by-Country Report.
- Inconsistencies between the three levels often trigger audits.
What are the risks of poor documentation?
Incomplete, inconsistent, or incorrect documentation can lead to:
- Transfer pricing adjustments.
- Fines for formal non-compliance.
- Late payment interest.
- Increased risk of recurring audits.
- Reputational damage to the multinational group.
Strategic approach: beyond formal compliance
From an expert perspective, transfer pricing documentation should not be understood as a mere formal requirement, but as a tool for tax risk management. Proper alignment between the Local Report, Master Report, and Country-by-Country Report strengthens the taxpayer’s defensive position and significantly reduces exposure to the tax authority.
Transfer pricing documentation with technical support and strategic vision
At TPC Group, as a company specializing in transfer pricing, we assist multinational groups in the comprehensive preparation of the Local Report, Master Report, and Country-by-Country Report, ensuring technical consistency, alignment with BEPS, and regulatory compliance in multiple jurisdictions. Our approach combines in-depth analysis, regional expertise, and strategic vision to reduce risks and strengthen our clients’ tax position.
Source: OECD