Local file is a critical tier of the transfer pricing documentation

Documentation is compulsory to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdictions

By Mahar Afzal/ Compliance Corner

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Published: Sun 16 Oct 2022, 2:53 PM

Transfer price refers to the prices of goods and services charged on transactions between the related parties and with the connected persons. The Organisation for Economic Co-operation and Development (OECD) BEPS Action 13 requires that businesses should maintain proper documentation in a three-tiered structured way where the arm’s length value of their related party transactions exceeds a certain threshold in the relevant tax period and the same has been almost reproduced in the para 7.12 of the public consultation document of the UAE corporate tax.

The OECD guidelines (the guidelines) require that the transfer pricing documentation is crucial to achieving three core objectives. One of them is to ensure that businesses give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns. Secondly, documentation is required to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment, and thirdly, documentation is compulsory to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdictions.


To achieve the above-mentioned objectives, the guidelines require that the countries should adopt a three-tiered standardised approach to transfer pricing documentation and maintaining a local file is one of them.

As discussed in our previous article, the master file is the ‘blueprint’ of the Multinational Enterprise (MNE) group, while the local file provides information about the local entity and controlled transactions between the related parties. The local file gives assurance that the taxpayer has taken appropriate measures to ensure an arm’s length price has been charged for all material transactions between related parties/associated parties.


The annexure II of Chapter V of the guidelines requires that the local file should include information about the (I) local entity, (ii) controlled transaction and (iii) financial information.

The information about the local entity includes the material about the management structure and organization chart of the local entity, which helps tax authorities to understand who is doing what in the organisation. To whom local management is reportable, and the country/countries in which such individuals maintain their principal offices. Moreover, the local file contains information about the competitors of the local business. It includes the detail of the business and the business strategy adopted by the local entity, including an indication of whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediate past year and an explanation of those aspects of such transactions affecting the local entity.

This section of the file contains information about the specific controlled transactions between the related parties. For each category of controlled transaction, the guidelines require that the businesses need to keep the description of the controlled transaction which can be sales of goods, management services, sale of intangibles etc. to the related parties, and the context in which such transactions took place. The guidelines require documenting the jurisdiction-wise amount of intra-group receipts and payments of the foreign recipient or payer along with associated enterprises involved in the controlled transaction and the relationship between the entities. The copies of all material intercompany agreements concluded by the local entity and the detailed comparability/functional analysis of the taxpayer and relevant associated enterprises, including any changes compared to prior years should be included in the local file. The assumptions taken, the summary of the financial information used in applying the transfer pricing methodology and the copy of existing unilateral and bilateral/multilateral advance pricing agreements should be included in the local file. What is the most appropriate transfer pricing method, and the reasons for its selection along with detail of the tested party and the reasons for its selection to be documented. The reasons for performing multi-year analysis, the list and description of selected comparable uncontrolled transactions (internal or external), and the description of any comparability adjustments, if performed should be included in the local file. A description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected transfer pricing method should be included.

As far as the financial information of the local file is concerned, the guidelines require that the businesses should keep the financial statements. Businesses would not need to keep audited financial statements; even unaudited ones would be acceptable. Businesses would have a combined cost/revenue, which requires allocation of the cost and revenue. Information and allocation schedules should be prepared and documented showing how the financial data has been used in applying the transfer pricing method. The relevant financial data should be maintained for comparables used in the analysis in a summarized format and the sources from which that data was obtained.

After the publication of the UAE corporate tax law, businesses which would be part of the MNE group and meet the revenue threshold criteria under the BEPS Action 13 would be required to have a proper local file in the light of the guidelines.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the public consultation document on corporate tax and OECD’s Guidelines. For any queries/clarifications, please write to him at compliance@kresscooper.com


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