Master File and Local File

The exchange of country-specific reports (CbC Reporting) was declared a minimum standard within the framework of Action Point 13 of the OECD BEPS Project . Switzerland has undertaken to implement it from 1 January 2018. But there are other standards in the BEPS Action Point 13 that Swiss companies should not underestimate - the Master and the Local File.

The Master and Local File are not considered minimum standards, it is therefore up to the countries to implement them or not. So far, Switzerland has declined to demand such documentation from companies in Switzerland, but multinational companies must nevertheless remain vigilant. Companies with their headquarters in Switzerland can be committed to submit Master or Local File abroad, due to their business activities by foreign group companies or permanent establishments outside of Switzerland.

But what exactly is a Master File and a Local File?

Master File

The master file is intended to provide the tax authorities with a general overview of the group's business activities and to help identify the existence of essential transfer pricing risks. It shall contain the following:

  • Organisational structure
  • Description of business activities
  • Information on intangible assets
  • Overview of intercompany financial activities
  • Financial position
  • Tax positions (incl. listing and brief description of existing tax rulings)

Local File

The Local File should be an addition to the Master File. Thus, certain cross-references to the Master File are also permitted. The local file should contain the following:

  • More detailed information on significant intra-group, cross-border business relationships (including information on the type and amount of transactions with affiliated companies, a comparability analysis, selection and application of the most appropriate transfer pricing metrics)
  • Identification of transfer pricing issues
  • Tax rulings, which refer to business transactions described in the Local File

Risk minimization

If a country demands a Local and a Master File, the companies must provide these directly to the local tax authorities. Which countries demand the Master and the Local File on a legal basis has not yet been conclusively clarified. Countries that have announced an implementation are e.g. Germany, Spain, Holland, Belgium, Sweden, South Korea, China. As countries implement Master and Local File in their national legislation, the requirements for the Master and Local Files as well as the thresholds and submission deadlines can vary.

It is clear, however, that companies that do not submit the master and local file, or submit it too late, can expect heavy fines. In order to mitigate this risk and avoid unnecessary costs, it is important for companies to tackle this documentation requirement at an early stage. For companies in Switzerland with tax connections abroad, it is recommended to develop and implement a comprehensive master file and local file concept. The documentation should be viewed as a complete work covering the entire activities of the group and should be prepared from an internal and external risk perspective for all countries, regardless of whether all countries legally require the preparation of a Master File or Local File. This allows the company to react quickly if further countries announce the implementation of Master and Local Files. The level of detail of the documentation can vary per country. If necessary, a rudimentary local file can be adapted very quickly to a required higher level, which would significantly reduce the risk of fines and penalties. In addition, this approach gives the company good control over the entire accounting system and allows it to identify any inconsistencies and errors and also benefit from them in terms of planning.

Final remark

The BEPS Action Point 13 is the beginning of a new age of cross-border planning and assessment of taxes. In the future, the tax authorities will have an information level on companies, which has not been there before. It cannot be ruled out that this striking change in the system may influence the thinking and actions of tax authorities in the individual countries. The authorities will increasingly assume that they can and will want to have all relevant information at their disposal. Thus it could be that within a short period of time countries already assume that multinational companies must have a master and a local file on file.

For further information please refer to the article "Transfer pricing documentation and country-by-country reports (CBC Reporting)" by Andreas Fross and Daniel Ledergerber in "Expert Focus,Edition 10/2017, p. 726-735".