The purpose of filing the Master File is to provide the competent tax administrations with an overview of the group’s business 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 tax administrations to assess whether a significant Transfer Pricing risk is present.
Master File: Key to Transfer Pricing Compliance
The BEPS plan arises in a context where large companies are able to artificially separate the attribution of their taxable profits to 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.
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. In this article, we explain what the Master File is and why it is essential to comply with Transfer Pricing regulations.
What is the Master File and why is it important?
The purpose of filing the Master File is to provide the competent tax administrations with an overview of the group’s business and its related parties, including the nature of its business operations, its economic activities, its general transfer pricing policies and the sharing 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 in order to place the group’s Transfer Pricing practices in their global economic, legal, financial and tax context.
Benefits of the Master File for Businesses
- Regulatory Compliance: The Master File helps companies comply with international transfer pricing regulations, such as those set out by the OECD in its BEPS (Base Erosion and Profit Shifting) Action Plan. By providing clear and detailed information, companies reduce the risk of penalties, tax adjustments and comprehensive audits.
- Reduced Tax Risks: By having a well-prepared Master File, companies can justify their Transfer Pricing policies and mitigate the risk of tax disputes. A complete and consistent document minimizes the possibility of 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 not only serves as a compliance tool, but also as a strategic tool that allows companies to review and adjust their Transfer Pricing policies. In this way, 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 have a presence and eliminating the contingency risks associated with them.
How to Prepare an Effective Master File?
To prepare an effective Master File, it is crucial to follow the guidelines established by the OECD and adapt the content to specific local requirements. It is recommended to 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 policy.
Conclusion
In short, the Master File is an indispensable tool for any multinational company seeking to comply with Transfer Pricing regulations and avoid tax risks. A well-prepared document not only ensures regulatory compliance, but also offers opportunities to optimize the global tax strategy.
Source:
OECD.(2024). “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.”
