Transfer pricing documentation is the file a company must hold to prove that the prices charged between entities of its group comply with the arm's length principle. It follows the two-tier structure recommended by the OECD in Action 13 of the BEPS project: a master file describing the group, and a local file describing the local entity's transactions.
The master file covers the group as a whole. It sets out the legal and operating structure, the intangibles held, the intragroup financing arrangements, and the consolidated financial and tax position. One master file serves the entire group.
The local file covers one entity and is where audits actually focus. A usable local file documents, for each material transaction:
- the nature and amount of the transaction, and the counterparty entity involved
- the functions performed, assets used and risks assumed by each party
- the transfer pricing method selected and why it fits the transaction
- the comparables used, with the resulting arm's length range
- the intragroup agreements governing the flow, and evidence the service was rendered
In France, documentation is mandatory above thresholds that recent finance legislation lowered significantly, and the minimum penalty for failing to produce it was raised to 50,000 euros per audited financial year. A separate country-by-country report applies to groups above 750 million euros of consolidated revenue. Below the thresholds, prices must still be defensible: only the formal obligation differs.
The recurring failure is evidentiary rather than technical. Reconstructing a cost base, an allocation key and proof of delivery three years after the fact is what makes an audit expensive. Phacet produces that trail continuously: the invoice versus contract control agent checks each intragroup invoice against the agreement, leaving an audit trail that supports audit-ready processes.
