While the CbC report and the master file have attracted the most attention among the OECD’s recommendations for transfer pricing documentation as they are new, as a practical matter local documentation requirements will impose a much greater burden upon MNEs because of the sheer volume of information required. Local files, which are customized for each country (and possibly each legal entity and multiple transactions) will continue to impose the high costs and raise the greatest risks for MNEs.

This point is illustrated in Table 1 below, which shows the number of information requests that an MNE may have to respond to in order to comply with the basic requirements that the OECD has included in its recommendations for local documentation for three sizes of MNE: (i) a mid-sized MNE that operates in 20 different countries; has 25 legal active legal entities; and averages just one transaction per legal entity; (ii) a larger MNE that operates in 40 countries, has 70 active legal entities, and averages two transactions per legal entity; and a (iii) a large MNE that operates in 60 countries, has 200 active legal entities, and averages 3 controlled transactions per legal entity. (Note that, at the very least, tangible property transactions, intangible property transactions, services transactions and financial transactions all have different attributes which often require different documentation.)

The OECD’s recommended local country documentation lists 20 discrete data requests, 4 of which request data at the legal entity level and 16 of which request data at the transaction level. If each data requirement is treated as the equivalent of an IDR, simple math suggests that MNEs with the attributes listed in Table 1 need to prepare responses equivalent of 500, 2,520, and 10,400 IDR responses per year, with updated responses expected in each future year. Somewhat arbitrarily assuming a cost of $500 per response, this translates into costs of $250,000; $1.25 million; and $5.2 million, respectively, for the MNEs with the attributes shown in Table 1, with these costs recurring each year. And this does not allow for either additional customization mandated by specific local country requirements or additional tax department responsibilities around transfer pricing such as defending audits, formulating financial statement positions, dealing with non-standard events such as acquisitions and divestitures, and of course tax planning.

Table 1





Number of Countries




Number of Legal Entities




Avg. Number of Transactions per Legal Entity




Number of OECD Data Requests      
For Entity Level Data




For Transaction Level Data




Total Number of Responses Needed      
Entity Level




Transaction Level








While the dollar costs presented above are at best rough proxies, it is clear that the resources needed to meet compliance requirements are substantial, particularly when viewed over a five- to ten-year period. Tax departments often do not have the resources needed to respond in full, and therefore adopt various strategies to mitigate their costs.

The first and most obvious strategy is to limit the number of legal entities that are documented, using some type of selection process (possibly a risk scorecard – click here to see a discussion of how to create a risk scorecard. However, managing costs by simply limiting the number of documentation studies is likely to become increasingly ineffective in the future.

Tax authorities and taxpayers often have very different views on materiality, and in many cases there are a large number of transactions that are not material from the perspective of the MNE, but which are material from the perspective of the local tax authority.

A number of countries are requiring transfer pricing as a legal compliance matter, often at low transaction volumes. This puts MNEs that want to limit costs by documenting (for example) only one third of their legal entities into a bind, in that they have to prepare documentation where explicitly required by law, even if the volume of intercompany transactions is small. Doing this while maintaining a limit on the total number of studies may lead to a situation in which a number of larger transactions are left undocumented because resources are being use elsewhere.

Even absent specific regulatory requirements, tax authorities now routinely expect taxpayers to be able to show – on a contemporaneous basis – that their transfer prices are arm’s length.

While the overall number of transfer pricing audit is increasing for many MNEs, the likelihood of an audit in any given country is often fairly low. Thus, there is often a relatively low likelihood that the documentation prepared for any specific legal entity will actually be reviewed. If there is only a one in five chance of an audit for any given legal entity, and the cost of documentation is $20,000 per legal entity, then the cost of documentation that is actually used in discussions with tax authorities is $100,000 per audit.

As reducing the number of reports that are prepared becomes a less and less viable option, MNEs should be shifting their focus to developing a more scalable process for preparing local files that is aimed at sharply reducing the incremental cost of an additional documentation report. While an MNE that is preparing documentation for 20 legal entities can think in terms of cost per report, one that is preparing to support the transfer pricing of 200 legal entities – each and every year – needs to focus on how to develop a process that minimizes the cost of an incremental report, regardless of whether that report comes about as a result of the addition of a new legal entity or a new tax year. Just to illustrate the point, an investment of $100,000 to create a process that lowers costs by $3,000 per report is not worth it for an MNE preparing 20 transfer pricing reports, as the incremental savings of $60,000 are lower than the up-front costs of $100,000. However, for an MNE preparing 200 transfer pricing report, that same $100,000 in up-front investment would generate savings of $600,000, with those savings being replicated each year.

In many cases, MNEs have started down this path by developing an EU-style “master file” that basically consists of a number of elements that are common to many reports, which are then either simply presented as a single “OECD” style report or which are cut and pasted into a variety of different local report. In some cases, MNEs are trying to further automate the process by either subcontracting out the documentation process to an outside vendor, who in turn may attempt to lower costs by outsourcing the documentation to low-cost providers (e.g., in India), or by trying to generate standardized reports using transfer pricing software.

While all of these are steps in the right direction, in my experience they are generally focused on replicating the output that is delivered to tax authorities rather than the data collection process, and often fail to identify specific elements of the documentation process that have common attributes that can logically be grouped together. Developing an effective scalable processes for supporting global transfer pricing requires tax department to shift their frame of reference from one specific type of grouping for all tasks – e.g., by country/legal entity — to one that focuses on the attributes of the information that can be effectively grouped together and carried out as a single task – what is the source of information, what process is used to collect and maintain required information, what is the most effective approach for using that information. In this regard, it is worth noting that the information that the OECD is calling for to document transfer pricing is often used for other purposes as well. Under such circumstances, there are obvious advantages to having a single data collection process, and then focusing on ways in which this common set of data can be used for multiple purposes. Doing this requires looking at the data collection and analysis process as an integrated whole rather than on a country-specific basis. Possible approaches to doing this will be discussed in future blogs.

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