In this short article, we explain what the Master File is and when you need to create one. We also give an overview of the items that need to be included.
Please note that the Master File is just part of the documentation requirements that apply to MNEs. You can read more in our general article on Transfer Pricing Documentation.
What Is A Master File?
A ‘Master File’ is a detailed type of transfer pricing documentation that is mandatory for Multinational Enterprises (MNEs) when specific requirements are met.
In an attempt to achieve more transparency on the transfer pricing policies applied by MNEs, the OECD updated in 2015 the documentation requirements in Chapter V of the OECD Guidelines. Since then, MNEs are expected/required to document their transfer pricing information in the form of a Master File and a Local File.
The Master File provides a high-level overview of the MNE group’s global business structure and activities. It also explains the global transfer pricing policies.
The Local File is meant to support the Master File. The Local File relates to a specific taxpayer in a specific country. This is usually a single legal entity. The local file is intended to deliver a more detailed overview of the related party transactions that are entered into by a specific taxpayer and the comparison of the transfer pricing policies with the actual (financial) result.
The Master File is intended to provide tax administrations with an overview of the economic, legal, financial and tax arrangements within a MNE. It gives them a “blueprint” of the operations of that particular MNE. This helps them assess the transfer pricing position.
When Do You Need A Master File?
Well, that really depends on the country of operation.
Unlike the guidance that has been given on Country-by-Country Reporting (article coming soon), the OECD has not given a specific threshold for the preparation of a Master File. This could mean that the OECD thinks that MNEs should always prepare a Master File.
However, it is more important to look at the domestic legislation in the countries that the MNE is operating in. In a lot of countries there are certain minimum (group) revenue thresholds that need to be met, before a Master File is required.
For example, in South-Korea it is only obligatory for an entity to prepare a Master File if:
(i) the volume of cross-border related-party transactions exceeds KRW 50bn (approx. USD 42.5m); and
(ii) the sales revenue exceeds KRW 100bn (approximately USD 85m).
So, depending on local legislation, the preparation of the Master File can be voluntarily or mandatory. When mandatory, it should be considered as a tax compliance requirement. MNEs are advised to carefully assess whether the preparation of Master File is mandatory.
What Needs To Be Included?
As mentioned, the Master File is intended to provide a “blueprint” of the operations of a particular MNE. Contrary to the Local File, this means that the information included has a more general character. The information required is divided in five categories:
- the MNE group’s organizational structure
- a description of the MNE business(es)
- the MNE intangibles
- the MNEs intercompany financial transactions
- the MNEs financial and tax position. More specifically, the following information should be included in the master file:
1 – Organizational structure
A chart illustrating the MNEs legal and ownership structure and geographical location of operating entities.
Description of MNEs business(es)
2 – General written description of the MNEs business
The following items should be included:
- Important drivers of business profit.
- A description of the supply chain for the group’s five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5 percent of group turnover. The required description could take the form of a chart or a diagram.
- A list and brief description of important service arrangements between members of the MNE group, other than research and development (R&D) services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services.
- A description of the main geographic markets for the group’s products and services that are referred to in the second bullet point above.
- A brief written functional analysis describing the principal contributions to value creation by individual entities within the group, i.e. key functions performed, important risks assumed, and important assets used.
- A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year.
3 – MNEs intangibles
The following items should be included:
- A general description of the MNEs overall strategy for the development, ownership and exploitation of intangibles, including location of principal R&D facilities and location of R&D management.
- A list of intangibles or groups of intangibles of the MNE group that are important for transfer pricing purposes and which entities legally own them.
- A list of important agreements among identified associated enterprises related to intangibles, including cost contribution arrangements, principal research service agreements and license agreements.
- A general description of the group’s transfer pricing policies related to R&D and intangibles.
- A general description of any important transfers of interests in intangibles among associated enterprises during the fiscal year concerned, including the entities, countries, and compensation involved. MNEs inter-company financial activities
4 – The MNEs intercompany financial transactions
The following items should be included:
- A general description of how the group is financed, including important financing arrangements with unrelated lenders.
- The identification of any members of the MNE group that provide a central financing function for the group, including the country under whose laws the entity is organized and the place of effective management of such entities.
5 – The MNEs financial and tax position
The following items should be included:
- A general description of the MNEs general transfer pricing policies related to financing arrangements between associated enterprises
- MNEs financial and tax positions
- The MNEs annual consolidated financial statement for the fiscal year concerned if otherwise prepared for financial reporting, regulatory, internal management, tax or other purposes.
- A list and brief description of the MNE group’s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries.
Attention Points When Preparing the Master File
When preparing the Master File, it is advisable to take into account the following attention points:
- Make sure that the Master File is consistent with the Local File and any other transfer pricing documentation to avoid questions from local tax authorities.
- Make sure that the Master File is available in time to avoid fines and penalties.
- Make sure to update financial information annually.
- Make sure that the Master File is consistent with other financial information such as annual accounts.
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