New Transfer Pricing Standards Raise the Bar and Widen the Net— Starting at $20 Million in Revenue
Clayton & McKervey
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? |
| Austria |
|
Yes |
| Belgium |
|
Yes |
| Denmark |
|
Yes |
| Germany |
|
Yes |
| Netherlands |
|
Yes |
| Poland |
|
Yes |
| Spain |
|
Yes |
| Sweden |
|
Yes |
| Switzerland |
|
Yes |
| UK |
|
Yes |
| Australia |
|
Yes |
| Mexico |
|
Yes |
| Israel |
|
Yes |
| China |
|
No |
| India |
|
Yes |
| Japan |
|
Yes |
| South Korea |
|
Yes |
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.