Plain English
This is the paper trail. It is not enough to price things correctly in theory; you have to be able to show a tax auditor, in writing, exactly how you got there — the business description, the functional analysis, the method chosen, and the comparables used. Since BEPS Action 13, this paper trail has a standard global structure: a master file describing the whole group, and local files describing each country's specific transactions in detail.
Technical definition
The contemporaneous written record — comprising, under the BEPS Action 13 three-tiered standard, a master file (group-wide information), local file(s) (entity- and transaction-specific analysis including functional analysis, method selection and benchmarking) and, for groups above the threshold, a country-by-country report — prepared to demonstrate that a taxpayer's controlled transactions are consistent with the arm's length principle and to satisfy applicable statutory documentation requirements.
Why it matters
Adequate documentation is frequently the sole determinant of penalty protection in a transfer pricing audit, independent of whether the pricing itself is ultimately sustained, and it is the primary tool advisors and in-house teams use to build and preserve institutional knowledge of pricing rationale over time.
How it works in practice
- 01Prepare a master file covering group structure, value drivers, intangibles, financing and tax positions.
- 02Prepare a local file per entity covering local business description, controlled transactions, functional analysis and benchmarking.
- 03Ensure consistency between master file, local files and the country-by-country report.
- 04Update documentation at least annually, or per local statutory refresh cycles.
- 05Retain documentation for the statutory record-keeping period, often 5-10 years.
Worked example
Local file supporting a manufacturing entity
A contract manufacturer in Vietnam prepares a local file describing its function as a limited-risk toll manufacturer for its Japanese parent, supported by a benchmarking study of five comparable Southeast Asian contract manufacturers earning a full-cost mark-up of 5-8%. When Vietnamese tax authorities open a routine audit two years later, the existence of a contemporaneous, well-reasoned local file — rather than one hastily reconstructed after the audit notice — is what allows the case to be closed within months rather than escalating to a multi-year dispute.
Common mistakes
- Preparing documentation only after an audit notice, losing 'contemporaneous' status and associated penalty protection.
- Copy-pasting prior-year documentation without updating for business or benchmarking changes.
- Inconsistencies between the master file narrative and local file transaction descriptions.
Audit red flags
- Local files with no benchmarking update in three or more years.
- Master file and local files describing different value chains for the same business.
- No documented rejection matrix explaining excluded comparables.
Documentation & data
Documents to hold
- Master file per BEPS Action 13 standard.
- Local file(s) with functional analysis, method selection and benchmarking.
- Search strategy and comparable rejection log.
- Intercompany agreements referenced and attached.
Data you need
- Entity-level financial statements segmented by transaction type.
- Benchmarking database access for comparable searches.
- Organisational and value chain information for the master file.
Who owns this internally: In-house tax, typically with external advisor support for benchmarking and drafting.
Jurisdiction notes
- OECD/BEPS Inclusive Framework
- Broad alignment on the three-tiered structure, though local language and submission-versus-retention requirements vary.
- United States
- Uses a functionally similar but separately governed contemporaneous documentation standard under Treas. Reg. 1.6662-6(d).
Notes by role
Advisors & consultants
The quality bar that matters on audit is reasoned analysis, not page count — auditors discount templated boilerplate quickly.
Students & job seekers
Local file preparation is the most common first assignment in a graduate transfer pricing role — know its structure cold.
Frequently asked
- Is a master file the same everywhere?
- The content requirements are broadly standardised under BEPS Action 13, though a small number of countries add local-specific elements.
- Does documentation guarantee no adjustment?
- No — it demonstrates a reasonable, good-faith position and typically secures penalty protection, but a tax authority can still challenge and adjust the underlying pricing.
Sources & status
- Primary source
OECD Transfer Pricing Guidelines, Chapter V
OECD, 2022
- Primary source
OECD BEPS Action 13 Final Report
OECD, 2015
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
Careers
How this shows up in the job
Documentation drafting is the most reliable entry-level skill to build first — it forces fluency across functional analysis, method selection and benchmarking simultaneously.
Careers in transfer pricing