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Local File – Transfer Pricing Documentation

Transfer pricing local file documentation represents a critical component of multinational enterprises’ compliance obligations under international tax frameworks 1. The local file serves as jurisdiction-specific evidence that related party transactions comply with the arm’s length principle, providing tax authorities with detailed information necessary for informed risk assessment and audit procedures 2.

Understanding the Local File Within OECD’s Three-Tiered Framework

The local file constitutes the second tier of the OECD’s standardized transfer pricing documentation approach established under BEPS Action 13 3. Unlike the master file which provides high-level group overview, the local file focuses specifically on material intercompany transactions affecting the local jurisdiction 4.

The three-tiered documentation structure ensures comprehensive transfer pricing compliance while minimizing duplicative reporting burdens 5. Tax administrations utilize local file information to conduct thorough functional analyses and verify that transfer pricing methodologies appropriately reflect economic substance 6.

Local Entity Information Requirements

Management Structure and Organizational Details

Local file documentation must include comprehensive management structure information detailing the local entity’s governance framework 7. This encompasses organizational charts illustrating reporting relationships and identifying key personnel responsible for local operations.

Documentation should specify the countries where senior management maintains principal offices, establishing clear lines of authority within the multinational enterprise structure 8. Tax authorities require this information to understand decision-making processes and evaluate whether transfer pricing policies reflect genuine business arrangements.

Business Description and Strategic Context

Detailed business descriptions must encompass the local entity’s specific activities, market positioning, and strategic objectives 9. Documentation should address any business restructurings or intangible property transfers affecting the local entity during the current or immediately preceding fiscal year 10.

The business strategy section requires analysis of competitive positioning and market conditions influencing operational decisions 11. Local file preparation should demonstrate how strategic choices align with transfer pricing arrangements and support arm’s length pricing determinations.

Competitive Environment Analysis

Local file documentation must identify key competitors operating within the same market segments and geographic regions 12. This competitive analysis provides essential context for evaluating whether related party transaction terms reflect market conditions 13.

Tax authorities utilize competitive landscape information to assess comparability factors and validate transfer pricing method selection 14. Documentation should address regulatory conditions and economic circumstances affecting both the local entity and its competitors.

Controlled Transactions Documentation Requirements

Material Transaction Categories and Descriptions

Local file documentation must categorize controlled transactions by type, including manufacturing services, goods transfers, service provisions, financing arrangements, and intellectual property licenses 15. Each transaction category requires detailed descriptions explaining the commercial rationale and business context 16.

Transaction aggregation into categories must reflect similar economically relevant characteristics and consistent transfer pricing methodologies 17. Documentation should explain why specific transactions can be reliably priced using the same analytical approach.

Financial Quantification by Tax Jurisdiction

Documentation must include comprehensive breakdowns of intra-group payments and receipts organized by tax jurisdiction of foreign counterparties 18. This financial mapping enables tax authorities to understand cross-border fund flows and assess potential profit shifting risks 19.

Local file requirements extend to distinguishing between different payment types including product sales, service fees, royalties, and interest charges 20. Tax authorities utilize this granular financial data to evaluate whether transaction pricing aligns with comparable market rates.

Associated Enterprise Identification and Relationships

Complete identification of associated enterprises participating in controlled transactions forms an essential local file component 21. Documentation must specify ownership relationships, legal structures, and functional connections between related parties 22.

Relationship mapping should address direct and indirect ownership structures, voting control arrangements, and management influence mechanisms 23. This information enables tax authorities to understand how related party status affects transaction pricing and terms.

Intercompany Agreement Documentation

Local file preparation requires inclusion of material intercompany agreements governing related party transactions 24. These agreements provide evidence of contractual terms, risk allocation arrangements, and functional responsibilities 25.

Documentation should demonstrate consistency between legal arrangements and actual business conduct 26. Tax authorities examine agreement terms to verify that contractual allocations reflect genuine business substance and economic reality.

Functional Analysis Requirements

Comprehensive functional analysis represents the cornerstone of local file controlled transaction documentation 27. This analysis must detail functions performed, assets utilized, and risks assumed by each transaction participant 28.

Functional analysis documentation should address year-over-year changes in operational arrangements and their transfer pricing implications 29. Tax authorities require detailed functional assessments to evaluate whether related party compensation appropriately reflects economic contributions.

Transfer Pricing Method Selection and Application

Local file documentation must identify the most appropriate transfer pricing method for each transaction category with supporting rationale 30. Method selection justification should address comparability factors, data availability, and reliability considerations 31.

Documentation should explain methodology application procedures and demonstrate compliance with arm’s length pricing principles 32. Tax authorities examine method selection to verify that chosen approaches provide the most reliable arm’s length results given available information.

Financial Information Documentation Standards

Annual Financial Statement Requirements

Local file preparation mandates inclusion of annual financial statements for the local entity covering the relevant fiscal period 33. These statements provide baseline financial performance data essential for transfer pricing analysis 34.

Financial statement documentation should encompass audited statements where available, supplemented by management accounts for interim periods 35. Tax authorities utilize this financial data to assess overall entity profitability and validate transfer pricing outcomes.

Allocation Schedules and Supporting Information

Detailed allocation schedules demonstrating cost, income, and expense attributions represent mandatory local file components 36. These schedules should explain allocation methodologies and provide transparent links between financial statements and transfer pricing calculations 37.

Allocation documentation must address both direct and indirect cost assignments, service charge calculations, and profit attribution mechanisms 38. Tax authorities require detailed allocation explanations to verify that transfer pricing adjustments accurately reflect economic substance.

Transfer Pricing Method Financial Data

Local file documentation must include specific financial data utilized in transfer pricing method applications 39. This encompasses comparable company data, profit level indicators, and statistical measures supporting arm’s length determinations 40.

Financial data presentation should facilitate tax authority review and verification procedures 41. Documentation must demonstrate data quality, reliability, and appropriate application within chosen transfer pricing methodologies.

Practical Implementation Considerations

Materiality Thresholds and Documentation Scope

Local file preparation obligations typically apply when controlled transactions exceed specified materiality thresholds established by domestic legislation 42. These thresholds vary significantly across jurisdictions, reflecting local economic conditions and administrative capacity 43.

Documentation scope should encompass all material transaction categories while avoiding disproportionate compliance burdens 44. Tax authorities recognize that documentation requirements must balance information needs with reasonable compliance costs for multinational enterprises.

Language and Filing Requirements

Local file submission must generally comply with domestic language requirements, though some jurisdictions accept documentation in commonly understood languages 45. Documentation preparation deadlines typically align with corporate income tax return filing dates 46.

Filing procedures vary between jurisdictions requiring annual submission and those requesting documentation only upon specific audit requests 47. Multinational enterprises must monitor local requirements to ensure timely compliance with jurisdiction-specific obligations.

Documentation Quality and Contemporaneous Preparation

Effective local file preparation requires contemporaneous documentation reflecting actual business arrangements and economic circumstances 48. Documentation quality directly impacts tax authority assessments and potential penalty exposure during audit procedures 49.

Tax authorities expect documentation to demonstrate genuine arm’s length analysis rather than post-hoc justification of predetermined pricing arrangements 50. High-quality local file preparation supports effective tax risk management and facilitates constructive dialogue with tax administrations during examinations.

  1. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, paragraph 5.22
  2. Roy Donegan, Global Transfer Pricing: Principles and Practice, 2023, Bloomsbury Professional, page 188
  3. OECD, Transfer Pricing Documentation and Country-by-Country Reporting, 2015, OECD Publishing, paragraph 22
  4. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, paragraph 5.22
  5. Mahar Afzal, Local File is a Critical Tier of The Transfer Pricing Documentation, 2022, LinkedIn, https://www.linkedin.com/pulse/local-file-critical-tier-transfer-pricing-mahar-afzal
  6. UN, United Nations Practical Manual on Transfer Pricing 2021, 2021, United Nations, Chapter 12
  7. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.A.1
  8. BDO Malta, Transfer Pricing: What is a local file?, 2025, https://www.bdo.com.mt/en-gb/insights/transfer-pricing-insights/transfer-pricing-what-is-a-local-file
  9. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.A.2
  10. Roy Donegan, Global Transfer Pricing: Principles and Practice, 2023, Bloomsbury Professional, page 189
  11. Tax Risk Management, Creating a Local File in Transfer Pricing Documentation, 2024, https://www.taxriskmanagement.com/creating-transfer-pricing-local-file/
  12. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.A.3
  13. MDDP, Local transfer pricing documentation. What should your Local File include?, 2024, https://www.mddp.pl/local-transfer-pricing-documentation-what-should-your-local-file-include/
  14. UN, United Nations Practical Manual on Transfer Pricing 2021, 2021, United Nations, paragraph 12.1.2
  15. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.B.1
  16. HM Revenue & Customs, INTM450102 – Transfer pricing records: categories of transactions, 2023, https://www.gov.uk/hmrc-internal-manuals/international-manual/intm450102
  17. HM Revenue & Customs, INTM450102 – Transfer pricing records: categories of transactions, 2023, https://www.gov.uk/hmrc-internal-manuals/international-manual/intm450102
  18. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.B.2
  19. Aibidia, Local File – Aibidia, https://www.aibidia.com/transfer-pricing-glossary/local-file
  20. Archipel Tax Advice, Optimizing Transfer Pricing Through Effective Documentation, 2025, https://www.archipeltaxadvice.nl/insights/transfer-pricing-documentation/
  21. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.B.3
  22. BDO Malta, Transfer Pricing documentation, 2025, https://www.bdo.com.mt/en-gb/insights/transfer-pricing-insights/transfer-pricing-documentation
  23. UN, United Nations Practical Manual on Transfer Pricing 2021, 2021, United Nations, Glossary
  24. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.B.4
  25. Kluwer Tax Blog, Transfer Pricing Documentation: What a Local File Could Look Like, 2019, https://kluwertaxblog.com/2019/07/24/transfer-pricing-documentation-what-a-local-file-could-look-like/
  26. Roy Donegan, Global Transfer Pricing: Principles and Practice, 2023, Bloomsbury Professional, page 189
  27. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.B.5
  28. Ioana Ignat and Liliana Ionescu-Feleag, Transfer Pricing in Manufacturing: An Analysis of the OECD Guidelines, 2019, Springer, Chapter 2
  29. MDDP, Local transfer pricing documentation. What should your Local File include?, 2024, https://www.mddp.pl/local-transfer-pricing-documentation-what-should-your-local-file-include/
  30. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.B.6
  31. UN, United Nations Practical Manual on Transfer Pricing 2021, 2021, United Nations, Chapter 12
  32. Tax Gate, Transfer pricing local file explained, 2025, https://www.youtube.com/watch?v=HRawVUqHCgM
  33. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.C.1
  34. Roy Donegan, Global Transfer Pricing: Principles and Practice, 2023, Bloomsbury Professional, page 190
  35. IBFD, An Overview of Transfer Pricing, 2018, IBFD
  36. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.C.2
  37. PWC, PWC-ITP-2015-2016-final, 2016, PWC, page 515
  38. Fundamentals of International Transfer Pricing in Law and Economics, Transfer Pricing in Multinational Corporations, 2012, Springer, page 18
  39. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, Annex II.C.3
  40. Resolving Transfer Pricing Disputes: A Global Analysis, Transfer Pricing Disputes in the European Union, page 175
  41. UN, United Nations Practical Manual on Transfer Pricing 2021, 2021, United Nations, paragraph 12.1.1
  42. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, paragraph 5.32
  43. KPMG, KPMG’s Global Transfer Pricing Review: Transfer pricing documentation summaries by jurisdiction, 2021, KPMG
  44. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, paragraph 5.33
  45. BDO Malta, Transfer Pricing documentation, 2025, https://www.bdo.com.mt/en-gb/insights/transfer-pricing-insights/transfer-pricing-documentation
  46. Malta Tax and Customs Authority, Guidelines in relation to the Transfer Pricing Rules, CFR, page 3
  47. UN, United Nations Practical Manual on Transfer Pricing 2021, 2021, United Nations, Chapter 12
  48. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, 2022, OECD Publishing, paragraph 5.27
  49. Resolving Transfer Pricing Disputes: A Global Analysis, Transfer Pricing in Spain, page 291
  50. Roy Donegan, Global Transfer Pricing: Principles and Practice, 2023, Bloomsbury Professional, page 189
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