he master file as described in the new OECD Guidance is a single document that is to be provided to all tax authorities, and as such is a new requirement. Unlike the CbC Report, which is generally limited to MNEs with $750 million or more in sales, a number of countries are requiring master files from much smaller companies. There is also uncertainty as to timing – some countries may require MNEs to submit the master file at the same time as their local file, others may allow for a later filing date. There is an expectation that same document will be shared in its entirety with any tax authority that asks for it.
At first there was quite a bit of discussion as to whether the development of a single document that was presented to all tax authorities would allow taxpayers an opportunity to provide a single detailed explanation and defense of their transfer pricing arrangements. As time has gone on, most taxpayers appear to be reaching the conclusion that this objective is far too ambitious, particularly given the wide disparity in how different tax authorities are likely to interpret the new OECD Guidance. Instead, they are focused on developing a document that meets the requirements set forth by the OECD, but which goes into relatively little unnecessary detail.
Even with this approach, the master file is likely to create incremental risk, with magnitude of this incremental risk depending upon the extent to which the master file is essentially summarizing and re-packaging information that is already available to tax authorities, or whether it is providing them with access to new information. In this regard, while much of the information that companies are asked to provide as part of the master file is available to tax departments and can be found in existing documents (e.g., an existing master file and/or an existing parent company documentation report; the 10-K and/or corporate Annual Report; tax packages), it is also true that much of this information has been closely held and not shared routinely with tax authorities. (Examples of this include tax agreements and APAs; central financing arrangements; intercompany agreements that do not directly involve the legal entity at issue.) Providing tax authorities with information that they have not had before is likely to increase the risk of transfer pricing audits and audit adjustments in a number of cases.
Perhaps the most obvious source of risk is inconsistency with other transfer pricing documentation, including both (1) the new CbC report (if that is required) and (2) local documentation reports and other information provided to tax authorities in key jurisdictions. While it is probably not feasible for a large MNE to review every local file prior to preparing the master file, it seems prudent to compare the master file with the documentation reports that have been prepared for say five (an arbitrarily chosen number) of the most important/highest risk jurisdictions. Note that if the comparison is done prior to issuing the master file, inconsistencies can be resolved either by changing the master file or changing the local file. However, once the master file has been issued, any inconsistencies have to be resolved by modifying the local file. (Unless, of course, the taxpayer is willing to identify and correct errors in an already released master file.)
In thinking about the risk of inconsistencies, it is worth keeping in mind that they may be less likely to occur with respect to high profile well known issues, such as descriptions around intangible ownership, than for either the details/exceptions that occur due to differing local circumstances (e.g., an explanation for a local risk that differs from the global description contained in the master file) or as a result of documentation that has been prepared to meet the varying biases of different tax authorities (e.g., supporting services charge-outs with allocation keys for some countries and with specific estimates of labor and other costs, which is expected by others. Finally, companies that have all or a substantial share of their documentation prepared by outside advisors will have to determine how to coordinate the positions taken in the master file with those taken in local files prepared outside of the company.
Inconsistencies may arise for less obvious reasons as well. For example, the master file may be based in part on information from an existing master file or parent company documentation (e.g., the description of intangibles), while drawing other information from its 10-K (e.g., the description of financial arrangements with third party lenders). But citing data from a 10-K to document financial arrangements with third party lenders may encourage tax authorities to review the 10-K for its discussion of intangibles and risks, and it is my experience that the 10-Ks may define and describe intangibles and risks in a way that is very different from that contained in the corresponding transfer pricing documentation reports.
Companies with existing tax controversies may be especially vulnerable to disclosures contained in the master file. In addition to the possibility that representations in the master file may differ from positions taken in litigation, there is also the potential concern that the offshore sources of information relied upon in the master file may provide tax authorities with an increased ability – from a practical perspective even if not from a legal perspective – to get access to information that is held outside of their jurisdiction.
Because of the above, the review of the master file is an important task, and one that may take more time to complete than is currently expected by many taxpayers.