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Tax & Assurance Guidance

New Transfer Pricing Standards Raise the Bar and Widen the Net— Starting at $20 Million in Revenue

Posted on April 27, 2017 by

Clayton & Mckervey

Clayton & McKervey

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Major trading partners implement stringent new transfer pricing rules

Transfer pricing has long been a tax concern for the largest multinationals and news articles on Apple, Starbucks, Google and others have raised the profile of this contentious tax issue. While the biggest companies (with global revenues greater than $850 million/ €750 million) have the most extensive new regulations, many middle market companies will be subject to the same requirements. Most notably, some companies with global revenues of €100 million, €50 million and even $20 million are now subject to the same higher transfer pricing documentation standards as large multinationals.

New Documentation Rules Require Far More Information on Cross-Border Transactions

New transfer pricing documentation standards require companies to provide information on both global business operations (a “Master File”) available to all tax authorities and a transfer pricing analysis (a “Local File”) for tax authorities in countries where a multinational operates. The parent company tax authority would have access to the Master File and all Local Files.

In Clayton & McKervey’s experience, these new requirements are more prescriptive both in terms of the volume of information required and the details that must be included in a report. For instance, a Master File should include written descriptions of important drivers of business profit, the supply chain for the five largest product lines, major service agreements within the group, and an explanation of which companies own intangibles by country.

By contrast, a Local File for each country, requires a thorough explanation of local business strategies, functions, risks and assets. Each Local File must also include an explanation of intercompany transactions, financial results and selection of the “Best/Most Appropriate Method” for benchmarking transfer prices.

Mid-sized Companies Are No Exception

While new documentation standards have been publicized for the largest multinationals (group revenues greater than $850 million/ €750 million), many countries are also requiring Master Files and Local Files for much smaller companies; some as low as $20 million in global revenues.

As an example, the Netherlands now requires companies with global group revenues of €50 million to prepare Master Files and Local Files to comply with Dutch transfer pricing documentation rules. Therefore, US companies with revenues greater than €50 million and Dutch subsidiaries would be subject to these Master File/Local File standards.

While countries such as the US and Canada do not explicitly have Master File and Local File thresholds for smaller companies, there is a significant increase in recent transfer pricing audit requests. Both the Internal Revenue Service and Canada Revenue Agency are regularly demanding transfer pricing documentation during tax audits, with a growing interest in middle-market companies.

New Transfer Pricing Documentation Thresholds
Country Master File/Local File Documentation Threshold New Development?
  • €50 million in Group Revenues
  • €50 million in Group Revenues or 100 employees
  • DKK 125 million (~$20 million) in Group Revenues and more than 250 employees
  • €100 million of Local German company revenue
  • €50 million in Group Revenues
  • €20 million in Group Revenues for Master File
  • Lower thresholds for Local File, incl. benchmarking studies
  • €45 million in Group Revenues
  • SEK 400 million (~$44.3 million) in Group Revenues and more than 250 employees
  • Thresholds to be announced
  • Thresholds to be announced
  • Modified Local File lodgment for companies with transactions greater than A$2 million
  • Details on transfer pricing methodologies utilized
  • Submission of Intercompany Agreements to the ATO
  • MXP 671 million (~$35.8 million) in Group Revenue for Master File – submitted to government
  • Local documentation still required for companies with Mexican revenues of 13 million MXP (~$US1 million)
  • Thresholds to be announced
  • RMB 200 million (~$29 million) of tangible property
  • RMB 40 million (~$5.8 million) for intangible property or services
  • Thresholds to be announced
  • Documentation standards still apply
  • Local File for intercompany transactions greater than 5 billion Yen (~$45.5 million); or
  • Local File for intangible property transactions greater than 300 million Yen (~$2.8 million)
South Korea
  • KRW 100 billion (~$176 million) in local country revenue and KRW 50 billion (~$88 million) in intercompany transactions


Bottom Line

Multinationals should revisit their transfer pricing documentation approach in light of these more stringent tax authority standards. The Master File/Local File requirements provide greater visibility over a company’s operations to auditors, raising tax risks considerably.

*Please note that this list does not include every country with the new Master File and Local File requirements as of April 2017.

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