Master File aims to provide competent tax administrations with an overview of the group’s business and its related parties, including the nature of its business transactions, its economic activities, its general Transfer Pricing policies, its profit sharing, and economic activities to enable tax administrations to assess whether a significant Transfer Pricing risk is present.
Master File: A Key to Transfer Pricing Compliance
The BEPS plan arises in a context where large companies can artificially separate the attribution of their taxable profits from the jurisdictions in which they occur, thus significantly reducing the income tax they are subject to or even not paying taxes in the jurisdictions where they operate. Action 13 of the BEPS Plan1, referring to the Transfer Pricing documentation, proposes a new and more efficient design of Transfer Pricing documentation for 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 Report, and iii) Country by Country Report. Hence, we will describe the importance of the Master File. The Master File is a fundamental element in the Transfer Pricing documentation for multinational companies. This report provides a global view of the structure and operations of the corporate group. Herein, we will address the Master File and its significance for Transfer Pricing regulations.
Importance of the Master File
Master File aims to provide competent tax administrations with an overview of the group’s business and its related parties, including the nature of its business transactions, its economic activities, its general Transfer Pricing policies, its profit sharing, and economic activities to enable the tax administrations to assess whether a significant Transfer Pricing risk is present. Indeed, the Master File aims 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 Benefits for Businesses
- Regulatory Compliance: The Master File assists companies in complying with international Transfer Pricing regulations, such as those set out by the OECD in its BEPS (Base Erosion and Profit Shifting) Action Plan. Detailed information reduces risks of penalties, tax adjustments, and comprehensive audits.
- Reduced Tax Risks: A well-prepared Master File can support Transfer Pricing policies and mitigate the risk of tax disputes. A complete and consistent document reduces possible adverse adjustments.
- Audit Facilitation and Transparency: The Master File provides a solid documentary basis for dealing with tax audits. This report provides a clear narrative of the group’s global operations, facilitating the audit process and showing tax authorities that the company is transparent and committed to regulatory compliance.
- Optimizing Tax Strategy: The Master File is a compliance and strategic tool for companies to review and adjust their Transfer Pricing policies. Thus, they can optimize their overall tax burden and improve long-term financial planning by complying with the Transfer Pricing regulations of the jurisdictions where the group companies operate and eliminating contingency risks.
Effective Master File Preparation
The effective preparation of the Master File is crucial to the OECD Guidelines, thus adapting the content to specific local requirements. It should include:
- A detailed description of the organizational structure of the group.
- Information on the main business activities and overall strategy.
- Details on intangible assets and their transfer within the group.
- Description of financial activities and their impact on the group.
- Analysis of the global tax position and Transfer Pricing policies.
Conclusion
Master File is indispensable for any multinational company intending to comply with Transfer Pricing regulations and avoid tax risks. A well-prepared document ensures regulatory compliance and offers opportunities to optimize the global tax strategy.
Source: OECD.(2024). "Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations."
