The Organization for Economic Cooperation and Development or OECD is comprised of representatives of 34 member governments and market economies, and advises standards for members and more than 70 non-member countries to promote sustainable economic development, growth and prosperity. The OECD has released global transfer pricing standards designed to reduce gaps in international business transactions and associated taxation. The program is based upon a 3-tiered transfer pricing standardization and monitoring system consisting of:
- Master Files (MFs)
- Local Files (LFs)
- Country-by-Country Reports (CbCRs)
The MF standard requires Multi-National Enterprises (MNEs) to report high-level information on their global business operations and internal transfer pricing policies. the LF standard is unique to each tax jurisdiction and requires disclosure of specified materials related to transactions with affiliated companies along with the amount of the transactions and the transfer pricing analyses. The CbCR standard will require MNEs to provide information to each tax jurisdiction where they conduct business including the number of employees, as well as crucial financial information such as revenue, profit, income tax calculations, capital, retained earnings and assets.
The goal of this program is quite obvious. Governments in free market economies and OECD members and non-members around the world are searching for ways to impose a more transparent financial reporting and monitoring system on MNEs and their international business transactions in order to reduce loopholes and increase transfer pricing tax revenues.
Many business entities may think “these global transfer pricing standards don’t apply to us, we aren’t in one of the major OECD member’s jurisdiction.” If you a subsidiary to a company who is located in one of these economies, or if you exceed consolidated revenue levels these standards will in all likelihood apply. The failure to comply results in extensive financial penalties, and could limit an organization’s ability to access and/or conduct trade or transactions within a given sovereignty.
International businesses and Multi-National Enterprises will need to re-think their transfer pricing strategies. The disclosure of too much information at any of the steps above may expose your company to unnecessary vulnerability before a sovereign tax authority. The failure to comply exposes your MNE to heavy penalties and interest, as well as the expense and impact of a comprehensive audit.
The accounting, legal and tax expertise provided by Allen Barron as a single-source vendor allows our clients to obtain higher quality insight and advice based upon a much broader perspective. One thing affects another, and international business transactions carry complex implications for revenue, profit, tax and earnings. What impact will global transfer pricing standards have upon your business strategy? We invite you to contact us for a free consultation at 866-631-3470 and learn how our integrated services can leverage economies of scale while providing more substantive and comprehensive insight and value for your company or enterprise.