The United States has its own transfer pricing rules under Internal Revenue Code (IRC) Section 482, IRC Section 6662, and the related Treasury Regulations. These rules govern how related-party transactions should be priced, and the documentation taxpayers should maintain to support their transfer pricing positions.
However, many U.S.-based multinational enterprises operate in countries that have adopted the OECD Transfer Pricing Guidelines and the OECD Base Erosion and Profit Shifting (BEPS) Action 13 documentation framework. As a result, businesses with cross-border operations often need to comply with both U.S. transfer pricing requirements and the transfer pricing documentation rules of the countries in which they operate.
Although the United States generally does not require taxpayers to prepare documentation in the OECD format, there is considerable overlap between the two systems. The information required under U.S. regulations is similar to the information contained in the OECD documentation framework.
For this reason, many multinational groups prepare documentation that satisfies both U.S. requirements and the OECD standards. This helps ensure consistency across jurisdictions, supports compliance with local transfer pricing regulations, and reduces the risk of disputes with multiple tax authorities.
Next, let’s understand the key components of the OECD’s transfer pricing documentation.
The OECD’s transfer pricing documentation framework consists of three main documents:
Next, let’s understand the first component of the OECD transfer pricing documentation: the master file.
A Master File gives tax authorities an overview of a multinational company’s global business. It explains how the group operates, where it conducts business, and how it manages its transfer pricing policies across different countries.
A Master File typically includes the following:
The United States does not generally require companies to prepare a Master File under its transfer pricing rules. However, a U.S.-based multinational group may prepare one if it operates in countries that require a Master File under their local transfer pricing rules.
Next, let’s understand the second crucial component of OECD transfer pricing documentation: the Local File
A Local File focuses on the related-party transactions of a specific company in a particular country.
For example, let’s assume a U.S. subsidiary buys products from its foreign parent. So, the Local File would explain the transaction, the functions performed by each company, the risks involved, and how the transfer price was determined.
A Local File typically includes the following:
The Local File is often an important part of a transfer pricing review. This is because it provides detailed support for why the company’s related-party transactions are consistent with the arm’s-length principle.
However, like the Master File, a Local File is not generally required under U.S. transfer pricing rules. The United States instead has its own documentation requirements under IRC Sections 482 and 6662 and Treas. Reg. §1.6662-6.
U.S. companies may nevertheless prepare a Local File when they operate in countries that require one or as part of their overall transfer pricing compliance process.
Next, let’s understand the third component of OECD transfer pricing documentation: Country-by-Country Report (CbCR)
A Country-by-Country Report (CbCR) provides tax authorities with a high-level picture of where a large multinational group earns income, pays taxes, and conducts business.
For qualifying multinational groups, the report generally includes information such as:
The CbCR is not designed to prove that a particular transaction uses an arm’s-length price. Instead, tax authorities use the information to identify potential transfer pricing risks.
For example, let’s say a multinational group reports a large amount of profit in a country where it has very few employees or assets. So, the tax authority may examine the CbCR to analyze whether profits have been appropriately allocated in that country.
In the United States, certain large U.S.-parented multinational groups are required to file Form 8975, Country-by-Country Report, if they meet the applicable requirements. The information may also be exchanged with foreign tax authorities under applicable international agreements.
Next, let’s understand how the OECD Transfer Pricing Documentation differs from U.S. Transfer Pricing Documentation.
The OECD and U.S. transfer pricing rules have similar goals: both aim to ensure that transactions between related companies are priced on an arm’s-length basis.
However, the documentation requirements are different.
The U.S. rules focus mainly on preparing and maintaining documentation that supports the transfer prices reported on a U.S. tax return. This documentation can also help a taxpayer qualify for protection from certain transfer pricing penalties under IRC Section 6662 if the IRS later challenges the company’s pricing.
The OECD framework uses a standardized three-part approach, which is as follows:
Many countries have adopted some or all of these OECD documentation requirements into their local tax laws.
For a multinational group operating in both the United States and other countries, the group may need to prepare documentation that meets both U.S. requirements and the requirements of the countries where it operates.
Now that we understand transfer pricing documentation, let’s review some best practices to follow when preparing transfer pricing documentation in the United States.