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Local File — The Local File is a country specific transfer pricing document that provides detailed information about the local entity's intercompany transactions, the transfer pricing methods applied, and the economic analysis (benchmarking) supporting arm's length...
The Local File is a country-specific transfer pricing document that provides detailed information about the local entity's intercompany transactions, the transfer pricing methods applied, and the economic analysis (benchmarking) supporting arm's length pricing. It demonstrates to local tax authorities that the entity's controlled transactions comply with the arm's length principle.
The Local File is part of the OECD's three-tiered documentation structure introduced under BEPS Action 13, alongside the Master File (global overview) and Country-by-Country Report (financial data).
The OECD Transfer Pricing Guidelines (2022), Annex II to Chapter V, prescribe Local File content. The Guidelines specify that the Local File should contain detailed information relating to specific intercompany transactions, including relevant financial information, a comparability analysis, and the selection and application of the most appropriate transfer pricing method.
Chapter V: Documentation at emphasizes that the Local File should provide detailed transactional transfer pricing documentation to demonstrate arm's length compliance for material controlled transactions.
Local File Contents (OECD Standard):
| Section | Content |
|---|---|
| Local Entity Description | Management structure, business strategy, key competitors |
| Controlled Transactions | Description of each material transaction type, amounts, counterparties |
| Functional Analysis | Functions, assets, and risks of local entity |
| Comparability Analysis | Comparable selection, search strategy, screening criteria |
| Economic Analysis | PLI selection, benchmarking results, arm's length range |
| Financial Information | Local entity financials, segmentation of results by transaction |
Key Characteristics:
Contemporaneous Documentation: Many jurisdictions require Local Files to be prepared "contemporaneously"—before or at the time of filing the tax return—not after an audit begins. Late preparation may forfeit penalty protection.
Local Entity: GermanCo (distribution subsidiary of US parent)
Local File Structure:
| Section | Content Example |
|---|---|
| Entity Overview | Full-risk distributor of consumer electronics in DACH region |
| Controlled Transactions | (1) Purchase of goods from USCo €50M, (2) Royalty to USCo €2M, (3) Management fee to USCo €0.5M |
| Functional Analysis | Marketing, sales, warehousing, customer service; limited IP; market risk |
| Benchmarking | TNMM with Operating Margin; 15 comparable distributors; IQR 2.5%-5.5% |
| Results | GermanCo OM = 3.8% → within arm's length range |
| Aspect | Local File | Benchmarking Study |
|---|---|---|
| Scope | All material controlled transactions + entity context | Specific transaction/entity analysis |
| Content | Includes functional analysis, compliance statements | Focused on comparable search and economic analysis |
| Regulatory Status | Formal document per BEPS Action 13 | Technical analysis within Local File |
| Audience | Tax authority compliance review | Supports Local File conclusions |
Requirements vary. Most OECD and G20 countries require Local Files for entities above certain thresholds. Some countries (like the US) have their own documentation requirements not called "Local File" but serving similar purposes. Always check specific local requirements.
Material controlled transactions—typically based on value thresholds set by local law. Common thresholds range from €100K to €5M per transaction type. Some jurisdictions require documentation for all controlled transactions regardless of size.
Length depends on transaction complexity. A simple Local File for a routine distributor might be 10-20 pages. Complex entities with multiple transaction types, intangibles, or financing might require 50+ pages. Quality and completeness matter more than length.
Typically by the tax return filing deadline for the relevant fiscal year. Some jurisdictions require submission with the return; others require it to be "available upon request." Contemporaneous preparation—before or at filing—is critical for penalty protection.
Many jurisdictions allow "roll-forward" of benchmarking studies for 3 years if the functional profile hasn't changed materially. Financial data for comparables should be updated annually. Full refresh is needed if functions, risks, or market conditions change significantly.
Local Files should reflect local requirements and local comparable sets where appropriate. A Master File might present a global study using one methodology, while the Local File uses jurisdiction-specific approaches (different IQR calculations, local comparables). Document the differences and explain the rationale.
The Local File typically covers all material transactions of the local entity in one document, with separate sections or appendices for each transaction type. Some practitioners prepare separate benchmarking studies per transaction, consolidated in one Local File.