3.3. The EU transfer pricing documentation: description of the approach
19. A common EU-wide approach on documentation requirements was considered beneficial both for taxpayers, in terms of reducing compliance costs and exposure to documentation-related penalties, and for tax administrations due to enhanced transparency and consistency. The Forum therefore examined the potential and merits of several possible common approaches to documentation requirements, i.e. "best practice", "standardized documentation" and "centralized (integrated global) documentation". The JTPF discussed this issue in the light of the experience of the Pacific Association of Tax Administrators (PATA) and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, aiming at maintaining a balance between the tax administrations’ right to obtain from a taxpayer the information necessary to assess whether the taxpayer's transfer pricing is at arm's length and the compliance cost for the taxpayer.
20. In the light of the pros and cons of the standardized and the centralized approaches, the JTPF developed a new approach called "EU Transfer Pricing Documentation" (EU TPD) which combines aspects of the standardized approach and of the centralized (integrated global) documentation approach. It consists of two main parts: one set of documentation containing common standardized information relevant for all EU group members (the "masterfile") and several sets of standardized documentation each containing country-specific information ("country-specific documentation"). The EU TPD approach means, therefore, that a multinational group of companies has a standardized and consistent set of documentation (the "masterfile" supplemented by "country-specific documentation") at company level.
21. The “masterfile” should follow the economic reality of the enterprise and provide a “blueprint” of the company and its transfer pricing system that would be relevant for all EU Member States concerned. Together, the "masterfile" and the "country-specific documentation" constitute the documentation file for the relevant EU Member State.
22. The EU TPD should cover all group entities resident in the EU including controlled transactions between enterprises outside the EU and group entities resident in the EU.
23. The EU TPD would serve both as a basic set of information for the assessment of a multinational enterprise (MNE) group’s transfer prices and as a risk assessment tool for taxpayers to identify transactions that may require more detailed explanations and documentation and for tax administrations for case selection purposes and as a starting point for examination of the company's transfer pricing. The EU TPD would have the potential to improve the quality of the documentation and enhance taxpayers' compliance with transfer pricing documentation requirements in EU Member States. It would thus reduce the risk of double taxation and exposure to documentation-related penalties. For tax administrations, the main advantage of the EU TPD approach is that all tax administrations involved would have access to the same common documentation and information in the masterfile element.
24. The EU TPD leaves some flexibility to taxpayers and to tax administrations as use of the EU TPD is optional for taxpayers while Member States may decide not to require transfer pricing documentation at all or to have transfer pricing documentation rules which require less information and documents than the EU TPD.
25. MNEs opting for the EU TPD should generally apply this approach collectively to all associated enterprises to which transfer pricing rules apply. However, some MNE groups have a decentralized organisational, legal or operational structure, or consist of several large divisions with completely different product lines and transfer pricing policies. In other cases the divisions of a MNE group have no inter-company transactions. Also, implementing a MNE's EU TPD in the group or in a recently acquired company may take some time. In all those cases, one single masterfile covering all EU group members might be inappropriate. In well justified cases, a MNE group should, therefore, be allowed to produce more than one masterfile or to exempt specific group members from the EU TPD.
26. A MNE group should not arbitrarily opt in and out of the EU TPD approach for its documentation purposes but should retain consistency and continuity in its documentation policy. Therefore, a MNE group that adopts the EU TPD should do so in a way that is consistent throughout the EU and from year to year.
27. Member States have to decide how to implement the EU TPD at national level, e.g. through domestic legislation, guidance, administrative practices, etc. so as to allow acceptance of the EU TPD at national level. The EU TPD should be implemented flexibly and should recognise the particular circumstances of the business concerned. In particular, smaller and less complex businesses (including SMEs) should not be expected to produce the amount or complexity of documentation that might be expected from larger and more complex businesses.
28. The masterfile should be provided and accepted in a commonly understood language for the Member States concerned. Translations of the masterfile should be made available only upon request. The country-specific documentation should be prepared in a language prescribed by the specific Member State concerned, even if the taxpayer has opted to keep the country-specific documentation in the masterfile.
29. The taxpayer should have to submit its EU TPD to the tax administration only at the beginning of a tax audit or upon specific request. However, each Member State retains the right to require, in its domestic law, a taxpayer to provide, upon specific request or during a tax audit, more information and documents than would be contained in the EU TPD.
30. Member States should not impose a documentation-related penalty where taxpayers comply in good faith, in a reasonable manner and within a reasonable time with the EU TPD or with a Member State's domestic documentation requirements and apply their documentation properly to determine their arm's length transfer prices.
31. Taxpayers avoid cooperation-related penalties where they have agreed to adopt the EU TPD approach and provide, upon specific request or during a tax audit, in a reasonable manner and within reasonable time additional information and documents going beyond the EU TPD.
