Introduction
The BEPS plan arises in a context in which large companies are able to artificially separate the attribution of their taxable profits from the jurisdictions in which they occur, which can result in such companies significantly reducing the income tax they are liable to in the jurisdictions in which they operate, or even not being taxed at all.
Action 13 of the BEPS Plan1, referring to Transfer Pricing documentation, proposes a new and more efficient design of Transfer Pricing documentation that allows tax authorities to obtain more and better information from their taxpayers and the multinational group they belong to.
This new design establishes a new three-level documentation standard: i) Master File, ii) Local File, and iii) Country by Country Report. On this occasion, we will describe the importance of the Master File.
What Is Master File?
The purpose of filing the Master File is to provide the competent tax administrations with an overview of the business of the group and its related parties, including the nature of its business operations, its economic activities, its general Transfer Pricing policies, and the distribution of its profits and economic activities, in order to enable the tax administrations to assess whether a significant Transfer Pricing risk is present.
Overall, the Master File is intended to provide a high-level view to place the group’s Transfer Pricing practices in their global economic, legal, financial, and tax context.
Master File Structure and Content
According to the OECD Guidelines, the Master File should provide relevant group information which can be grouped into the following five categories:
- Organizational structure: It includes an organizational chart illustrating the legal and geographic structure of the operating entities.
- Description of the group’s business: It contains a general description of the group’s activities, including the main sources of income and the supply chain of the main products or services
- Intangibles: They detail the group’s strategies for the development, ownership, and exploitation of intangible assets, as well as their location and the Transfer Pricing policies applied.
- Intragroup financing activities: They describe the group’s financing method and the main intragroup financing agreements.
- Financial and tax positions: They include the group’s annual consolidated financial statements and other relevant financial details.
Challenges and Considerations
One of the main problems observed in practice for a taxpayer filing the obligation is access to the financial and functional information of the other companies that comprise the group. In most cases, even the parent company does not share the financial and functional information of its subsidiaries since it is very confidential information for the economic group, which places the taxpayer filing the obligation at high risk for non-compliance or partial omission of the information to be declared, resulting in potential fines that could arise before an eventual audit process they would be subject to.
Call to Action
In order to learn more about the process of an efficient Master File and comply with international Transfer Pricing regulations, do not hesitate to contact TPC Group. Our team of experts is ready to assist you in every step of the process.
