Transfer Pricing Local File: Requirements, Checklist & Example

What is a transfer pricing local file?

Transfer pricing local file documentation is one of the main compliance obligations of multinational enterprises under international tax rules ¹. The local file serves as jurisdiction-specific evidence that related party transactions comply with the arm’s length principle, and it gives tax authorities the information they need to run risk assessments and open audits in a focused way ².

This guide walks through every section of the local file as set out in Annex II to Chapter V of the OECD Guidelines, adds a worked distributor example, a preparation checklist, and a one-page comparison with the master file and country-by-country report. It is written for groups that are documenting intercompany flows in or into European jurisdictions such as Cyprus, Malta, Ireland and the United Kingdom, but the structure is the one used in most countries that have adopted BEPS Action 13.

Understanding the local file within the OECD three-tiered framework

The local file is the second tier of the standardised transfer pricing documentation approach introduced by BEPS Action 13 ³. The master file provides a high-level overview of the group, while the local file concentrates on the material intercompany transactions that affect the local jurisdiction and shows that they are consistent with the arm’s length principle ⁴.

The three-tiered documentation structure keeps the compliance burden proportionate while giving tax administrations enough information to risk assess ⁵. Read in combination with the master file, the local file allows a tax authority to carry out a focused risk assessment on the local entity’s related party transactions ⁶. Chapter 12 of the UN Practical Manual follows the same structure and reinforces that the local file is where the functional analysis, method selection and benchmarking are shown in full ⁷.

Local entity information

Management structure and organisational chart

The local file must describe the management structure of the local entity, show a local organisation chart, and identify the individuals to whom local management reports together with the jurisdictions in which they are based ⁸. This section is used by tax authorities to understand where decisions are actually taken and whether the transfer pricing policy reflects the real governance of the entity.

The chart should show reporting lines up to group level and name the jurisdictions where senior managers hold their principal office ⁹.

Business description and strategy

The business description must set out the activities carried out by the local entity, its market position, the products or services sold, and the business strategy pursued, including any business restructuring or intangibles transfer that took place in the current or immediately preceding fiscal year ¹⁰. The same structural template is reproduced in several practice textbooks that walk through the sections of a local file for manufacturers, distributors and service providers ¹¹.

Where the entity has gone through a restructuring, the local file should flag the pre-change and post-change profile and refer back to the master file for the group rationale ¹².

Key competitors

The local file must name the main competitors of the local entity in each of the relevant business lines ¹³. The competitive environment informs the comparability analysis and supports the selection of comparables in the benchmarking study ¹⁴.

Controlled transactions

Material categories and context

For each material category of controlled transactions, the local file must give a description of the transaction, the context in which it takes place, and the amount of intra-group payments and receipts organised by tax jurisdiction of the foreign counterparty ¹⁵. Typical categories include procurement of manufacturing services, purchase or sale of goods, provision of services, loans and other financing, financial guarantees and licences of intangibles ¹⁶.

Transactions can be aggregated for documentation purposes only if they share similar economically relevant characteristics and are tested with the same method ¹⁷.

Identification of related parties and agreements

The local file must identify the associated enterprises involved in each category of controlled transactions and the relationships between them ¹⁸. It must also include copies of all material intercompany agreements that govern those transactions ¹⁹. The written contracts should be read alongside evidence of how the parties actually behave, so that the file demonstrates consistency between legal form and economic substance ²⁰.

Functional analysis and method selection

The functional analysis is the analytical core of the local file. It identifies the functions performed, assets used and risks assumed by each party, which is the framework commonly referred to as FAR ²¹. For intangibles-related transactions, the functional analysis must go further and identify which associated enterprise contributes to the development, enhancement, maintenance, protection and exploitation of the intangible, commonly abbreviated as DEMPE ²².

Once the FAR profile is set, the local file must identify the most appropriate transfer pricing method for each transaction category and explain why that method was selected ²³. The explanation should address the comparability factors, the availability of reliable data and the strengths and weaknesses of the alternative methods considered ²⁴.

Benchmarking documentation must then present the comparable search, the acceptance and rejection criteria, the final comparable set and the arm’s length range ²⁵. The OECD does not prescribe an interquartile range, but where comparability defects remain, measures of central tendency such as the median are commonly used to reduce the risk of error ²⁶.

For a deeper walkthrough of the five methods, see our overview of OECD transfer pricing methods, and for the practical mechanics of comparable searches see our article on Comparability analysis and transfer pricing benchmarking.

Financial information

The local file must include the annual financial accounts of the local entity for the year concerned, together with information and allocation schedules showing how the financial data used in applying the transfer pricing method can be tied back to the annual financial statements ²⁷. Audited statements should be supplied where available, and existing unaudited statements may be used otherwise ²⁸.

Summary tables of the comparable data and the profit level indicators used in the analysis are also required, so that the reader can replicate the arm’s length result from the file itself ²⁹.

Annotated local file example: a Cyprus distributor

The following worked example shows how a routine distributor would populate the key sections of a local file. The facts are hypothetical and the figures are for illustration only.

Transaction description

The local file would describe the flow as follows: EuroTech Distribution Cyprus Ltd buys finished consumer electronic goods from EuroTech Holdings AG and resells them to independent retailers in Cyprus and Greece under the group brand. The Cyprus entity does not hold the brand, does not conduct research and development, does not negotiate master supply agreements with third-party manufacturers and does not take ownership of unsold inventory beyond a thirty-day consignment window. Pricing to retailers is set within a price list approved by the principal.

Functional analysis

The functional analysis is typically shown in a FAR table. In this example, EuroTech Cyprus performs local sales support, order processing, logistics coordination with a third-party warehouse and after-sales customer care. It does not perform strategic marketing, product development, group procurement or treasury. The main assets used are tangible (office equipment, leased warehouse) and the entity carries limited market risk, limited inventory risk and no product liability risk, which is retained by the principal. On this basis, the Cyprus entity has the functional profile of a limited risk distributor, which is the standard baseline for routine buy-sell vehicles ³⁰.

Method selection

Because the Cyprus entity performs routine distribution functions and the principal is the entity that controls the key value drivers, the tested party is the Cyprus distributor. The chosen method is the transactional net margin method, with an operating margin on sales as the profit level indicator, which is the appropriate indicator for resale and distribution functions ³¹. The TNMM mirrors the mechanics of the resale price method but tests profitability at the net rather than the gross level ³².

Benchmarking and arm’s length range

A pan-European search of independent wholesale distributors of consumer electronics is run on a commercial database. After qualitative screening and a review of the functional profile, the final comparable set contains eight independent distributors. The three-year weighted operating margin on sales produces the following range:

EuroTech Cyprus reports an operating margin on sales of 4.1% for FY 2024 (EUR 1.75m / EUR 42.6m). That falls between the lower and upper quartiles of the benchmark set, which supports the conclusion that the controlled transaction is at arm’s length and that no transfer pricing adjustment is required ³³.

Financial reconciliation

The final section of the example local file ties the tested party’s segmented profit and loss account back to the statutory accounts. A typical reconciliation table might show the following:

The reconciliation shows that the entire operating result of the Cyprus entity in FY 2024 is attributable to the controlled distribution segment, which is exactly the segment that was benchmarked. In practice, where the entity has non-controlled turnover, the allocation schedule should isolate the tested party segment and explain the allocation keys used.

Local file preparation checklist

The table below pulls together each OECD-mandated section of the local file, the typical supporting documents, and the function within the group that holds the information. Teams can use the right-hand column as a request list when kicking off a documentation cycle, which the practice literature refers to as the strategy and design phase ³⁴.

Local File vs Master File vs CbCR

The three tiers of BEPS Action 13 are complementary. The table below summarises their different purposes, scope and contents.

Materiality, language, timing and penalties

Local file obligations usually apply when controlled transactions exceed a materiality threshold set by domestic law ⁴³. The thresholds reflect the size and nature of the local economy and should take into account the importance of the MNE in that economy ⁴⁴. The OECD also reminds tax administrations that documentation requirements should balance information needs with reasonable compliance costs ⁴⁵.

Local file submission usually has to comply with domestic language requirements, although some jurisdictions accept documentation in commonly understood languages such as English ⁴⁶. Preparation deadlines are generally aligned with the corporate income tax return filing date, with annual review of both the file and the benchmarking data ⁴⁷.

Documentation has to be contemporaneous. Most countries require records to be prepared at or before the time the transaction is undertaken, and in any event no later than the filing of the tax return ⁴⁸. Many jurisdictions impose documentation-specific penalties, and OECD guidance notes that penalty regimes should be designed to reward timely and accurate preparation and to make non-compliance more costly than compliance ⁴⁹. Where a local entity fails to produce documentation, the tax authority may select the method and comparables it considers appropriate and raise an adjustment, with interest and penalties on top ⁵⁰.

Related reading

• OECD transfer pricing methods: an introduction
• Comparability analysis and transfer pricing benchmarking
• Transfer pricing master file: structure and content
• Transfer pricing documentation: the global framework