Leveraging What You Already Have


Rodrigo Fernandez, Partner at EP


Addressing Base Erosion and Profit Shifting (BEPS) and perceived international tax avoidance techniques of high-profile multinational enterprises (MNEs) is a key priority of governments around the globe. In 2013, OECD and G20 countries, adopted a 15-point Action Plan to make a coordinated effort toward ensuring profits are taxed where economic activities generating the profits are performed and where value is created.

BEPS requirements and the information that’s provided should make it easier for tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments.


Of the 15 separate action points, Action 13 is intended to enhance transparency for tax administrations through providing adequate information to conduct transfer pricing risk assessments and examinations. This is carried out through fulfilling 2 requirements: (1) Transfer Pricing Documentation and (2) Country-by-Country (CbC) Reporting.

Transfer Pricing Documentation includes both the Master File and Local Files and is much less intimidating than many tax advisors have portrayed. The Master File is a high-level overview of the taxpayer’s global business operations and transfer pricing policies and there’s an expectation that it will be shared in its entirety with any tax authority that asks for it. The Master File is an important requirement that necessitates a thoughtful approach. However, much of the information used for the Master File can be leveraged from previous, compliance transfer pricing reports. Read more on Master File requirements HERE.

The Local File is transactional transfer pricing documentation which identifies relevant related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations. Although the Master File and CbC report have attracted the most attention because they’re new, local documentation requirements may impose a greater burden upon MNEs because of the large volume of information required. However, much like the Master File, local documentation requirements are much less intimidating if you’ve been compliant in your transfer pricing documentation in the past.

The third requirement is the CbC Report which requires MNEs to report annually and for each tax jurisdiction in which they do business. Including:

  • Revenue
  • Profit before income tax
  • Income tax paid and accrued
  • Total employment
  • Capital
  • Retained earnings
  • Tangible assets
  • Identifying each entity within the group doing business in a particular tax jurisdiction with an indication of the business activities

Simply put, the CbC report is a series of 3 tables that need to be filled out by taxpayers, but only if the threshold of 750 million euros or 850 million dollars in revenue is exceeded at the consolidated company level.[1]  The CbC report is a data-gathering challenge. The best approach to this is to have full support from your organization and design templates, models, and processes to assist in collecting and organizing the relevant information. Recently released guidance on CbC Reporting can be reviewed HERE.


These three documents will require taxpayers to (1) articulate consistent transfer pricing positions and (2) provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and provide information to commence and target audit enquiries. Subsequently, it should be easier for tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments.


The Value-chain Analysis (VCA) is one of the many requirements within the Master File and is likely the most important requirement for complex MNEs. At a high level, the VCA requires a full explanation of the origin of profits and the allocation of risks. When a MNE has so many sources of value, it’s important to be able to explain well where the profits should land and the risks that are born by the various legal entities within a MNE.  The point of a VCA is to demonstrate that the value chain is understood AND that profits (net and gross of transfer prices) correspond to value generated at each link in the value chain. To perform a VCA it is generally NOT necessary to perform a hyper-detailed micro-level analysis of DEMPE or of subjectively-defined “risks” and control over them. In creating your VCA, it should be approached with the understanding that BEPS is nothing more than an elaboration of the idea of comparability.

One of EP’s distinguishing marks is its emphasis on and use of transactional evidence in Value-Chain Analysis. We believe that VCA budgets should reallocate dollars from hyper-detailed DEMPE analysis toward the development of transactional data libraries. In virtually every case in which we obtain buy-in from tax departments, and in every litigation matter, we have found that internal transactional evidence is developed that was previously unnoticed. Controversies are resolved (and avoided) based upon transactional evidence.


Although the BEPS documentation and CbC reporting requirements can be intimidating, many of the master file and local file requirements are similar to US transfer pricing requirements in §6662. Companies don’t need to make a “whole-sale change” to their transfer pricing documentation; existing documentation can be leveraged if it was completed properly the first time. Companies can also take a proactive approach to managing transfer pricing to avoid pain points in the future. Including:

  1. Changing pricing in advance so profits and functions, assets, and risks are more aligned
  2. Utilize technology to manage the day-to-day pricing, thus avoiding large periodic adjustments (e.g. operational transfer pricing)


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Although these requirements are new, you can begin the work with what you have. If your documentation is already compliant with U.S. transfer pricing requirements, you’re already a long way down the road.

[1] Some countries have their own threshold requirements.



Mr. Fernandez brings experience from a variety of roles and industries, having held positions in product development, finance, and marketing for energy, aerospace, telecommunications, and software companies. He specializes in transfer pricing, business and intangible property valuation, and other and valuation-related projects where he applies his understanding of technology and his economic analysis experience.