Transfer pricing documentation – OECD master file and country-by-country reporting ante portas

The documentation of transfer pricing is already an established subject in Germany and at an international level. However, the OECD in the course of its measure "Base Erosion and Profit Shifting" (BEPS) shed a completely new light on the subject. In addition to the assurance that the transfer pricing is determined by the arm's length principle, the respective transfer pricing documentation must serve to enable the financial authorities to make a detailed risk analysis and assessment of the transfer pricing and therefore to create greater transparency. Is this a paradigm shift?

Three-tiered approach to transfer pricing documentation

The documentation requirements in future should be realised using a three-tiered approach:
  • Master file (master documentation)
  • Local file (documentation relating to the company )
  • Country-by-country reporting (reporting relating to the country)

Draft bill for the master file approach

On June 1, 2016 the German Federal Ministry of Finance (BMF) published the draft bill "Law to implement changes in the EU Mutual Assistance Directive and of further measures against reduction and relocation of profits". The draft bill is designed to counter the use of different tax systems by multinational companies and therefore to contain unfair tax competition. In particular, the draft bill implements the recommendations of the BEPS project of the OECD and realises changes to the EU Mutual Assistance Directive. Of significance is the implementation of the OECD master file concept and the introduction of country-by-country reporting (CbC reporting). The changes are implemented in § 90 par. 3 and § 138a of the German tax code (AO).

Implementation of the master file concept

In respect of the reporting obligations, from now on companies which belong to a multinational company group and in the previous year have realised a sales revenue of at least 100 million euros will in addition to the previous reporting requirements also have to attach an "Overview of the type of the global business operations of the company group and the system used to determine the transfer pricing" (so-called master file). In this process the limit of 100 million euros takes into account the sales revenue of affiliated companies and also third party companies and according to the current wording relates to the level of individual entities (§ 90 par. 3 AO). It can be doubted that this wording was intended due to the fact that otherwise also large company groups under some circumstances will not have to draw up a master file. The requirements for the obligation to create a master file, however, also have to be seen under consideration of the foreign legal interpretation. The obligation to present the file affects the respective country organisation so that it itself without exceeding the German limit of 100 million euros would be obliged to report. Since the master file usually can only be drawn up by a group parent company, the threshold value for a company group controlled from Germany will be practically irrelevant.


Obligation of country-by-country reporting

Through the new introduction of § 138a AO concerning the reporting obligations of multinational companies, the German financial authorities are following the explanations of the final report of measure 13 of the OECD. The new regulation only affects companies which in the last financial year recorded consolidated group sales of at least 750 million euros and the consolidated financial statement includes at least one foreign company or a permanent establishment abroad. Affected German company groups are correspondingly obliged to draw up and submit a country-by-country report (CbC reporting) to the German Federal Central Tax Office (BZSt). This includes disclosure of:
  • Income
  • Profit before tax
  • Income tax already paid and also deferred income tax
  • Capital as shown in the balance sheet
  • Retained profits
  • Employment data
  • Tangible assets


The submission of the corresponding information must be made at the latest one year after the end of the affected financial year.

The application of the supplementary transfer pricing regulations must be made for the financial year which begins after December 31, 2015, with a simultaneous fulfilment of the threshold values.



The future three-tier master file concept is designed much more than the previous documentation policy to promote transparency. In this process, the master file itself and the CbC reporting will be integrated in an intergovernmental exchange of information, whereby in the course of the documentation the taxpayer makes certain company information available to the country he resides in, which the country he resides in then exchanges with the other affected countries. The result is greater transparency, also in connection with foreign financial authorities which means it can be expected that in particular in emerging economies the desire will be awakened to collect a larger part of the tax which is available globally. It seems to be foreseeable that as a result international transfer pricing disputes will increase. At the same there is the risk that competitors will come into the possession of trade secrets when financial data and information about the value chain in future will have to be more openly listed in the documentation and foreign financial authorities perhaps may not necessarily adhere to the principles of tax secrecy. In practice there is also the risk that the financial authorities may use the data prepared in the CbC reporting not just for the assessment of risk, but also for the purpose of a formal profit distribution using the identified items. The local file which supplements the listings of the master file documentation with detailed information relating to transactions will therefore become very important in order to prevent any undesired conclusions from these indicators. Furthermore, the future documentation approach will also make the safeguarding of the confidentiality within a company group more difficult. In addition, it has to be assumed that in future the external tax auditor will in principle be more interested in definite company business figures regardless of the size of the company.


Companies are faced with new challenges

In Germany the new requirements regarding the documentation of transfer pricing have regularly been a topic of discussion since the statutory introduction of the documentation regulations in 2003. At the present time companies in this context, however, face new challenges. The documentation requirements in Germany and in other countries will be promptly implemented by the respective legislator. The increased requirements for the procurement and preparation of information will have a considerable effect on the previous cross-border documentation processes. As a result, there will be other effects as well as the effect of changing the documentation format. The general approach for drawing up documents which are internationally compatible and consistent with the complete company group will have to be redefined. Companies should already today come to terms with this process in order to be able to adapt existing processes in time.

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