Country-by-Country Report (CbCR) Preparation Guide [2025]: Avoid Common Errors

Quick Answer: What Makes Effective CbCR Preparation?

Country-by-Country Reporting (CbCR) is the third tier of the OECD's three-tiered transfer pricing documentation framework, providing tax authorities with a high-level global overview of an MNE's allocation of income, taxes, and business activities across jurisdictions.

Effective CbCR preparation requires three elements: (1) accurate data aggregation across all constituent entities, (2) consistent application of OECD data definitions for revenue, employees, taxes, and assets, and (3) proactive use of Table 3 to explain any apparent misalignments between profits and substance. The report is designed for risk assessment—not mechanical adjustments—so understanding how tax authorities interpret CbCR data is essential to avoiding unnecessary audit triggers.

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Understanding CbCR Purpose and Use

Why CbCR Exists

CbCR emerged from BEPS Action 13 (2015) as a tool to enhance tax transparency and identify base erosion risks. OECD Guidelines ¶5.25 describe CbCR as providing a "high-level overview" of the MNE's allocation of income, taxes, and economic activity—enabling tax authorities to take a global perspective of MNE groups.

The key insight: CbCR is a risk assessment and screening tool, not a substitute for detailed transfer pricing analysis. Tax authorities use it to flag potential BEPS concerns, but any adjustment still requires thorough examination of the underlying transactions.

What Tax Authorities Look For

Tax authorities analyze CbCR data through risk indicators that flag potential profit shifting:

These indicators inform a tiered risk model—anomalous entries in Table 1 trigger deeper review of specific affiliates. Indicators vary by tax administration; treat these as common examples rather than an exhaustive list.

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Who Must File? Thresholds and Entity Requirements

The €750 Million Threshold

Under the OECD model, CbCR filing is required if the MNE group's consolidated revenue in the preceding fiscal year meets or exceeds €750 million (or local currency equivalent).

Note: Currency conversion rules vary by jurisdiction. Some follow OECD's recommended approach, while others (like the UK) use the average exchange rate for the accounting period. Always verify current local implementation.

Filing Entity Responsibility

The Ultimate Parent Entity (UPE) of the group—the top company preparing consolidated financial statements—is responsible for filing the CbC report with its local tax authority.

Key Requirements:

• Each constituent entity must notify its local tax jurisdiction whether it is the UPE or whether a surrogate has been designated
• Once filed by the UPE, reports are exchanged between competent authorities under automatic exchange agreements
• Local entities generally do not file separately if the UPE has filed and exchange mechanisms are in place

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The Three CbCR Tables Explained

The OECD Annex III template consists of three tables, each serving a distinct purpose.

Table 1: Overview of Allocation by Jurisdiction

Table 1 provides aggregate data by tax jurisdiction for all constituent entities resident in that jurisdiction:

Table 2: List of Constituent Entities

Table 2 lists all constituent entities of the MNE group, organized by tax jurisdiction:

Critical Requirements:

• Every entity in consolidated accounts must be listed—even dormant subsidiaries
• Permanent establishments are listed separately under the host jurisdiction (not the head office's country)
• Activity codes should reflect principal business (use "Other" only when no specific code fits)

Table 3: Additional Information

Table 3 is a free-text section for explanatory notes. This is where proactive taxpayers differentiate themselves from audit targets.

What to Include:

• Explanation of data sources and methodology (e.g., consolidated vs. statutory figures)
• Clarification of unusual items (e.g., one-time gains, restructuring costs)
• Context for apparent anomalies (e.g., "High profit in Country X reflects asset sale proceeds")
• Currency conversion methodology if non-standard
• Any aggregation, rounding, or adjustment approaches used

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Step-by-Step CbCR Preparation Process

Effective CbCR preparation follows a structured workflow. This process ensures completeness, accuracy, and consistency across your group's reporting.

Step 1: Confirm Filing Obligation

Before you begin: Verify whether your group meets the consolidated revenue threshold (€750M or local equivalent) based on the prior fiscal year. Review your consolidation perimeter to ensure you're assessing the correct group structure.

Key questions:

• Does consolidated group revenue meet the threshold?
• Who is the Ultimate Parent Entity (UPE)?
• Are there any surrogate filing requirements?

Step 2: Map the Group Structure

Identify every constituent entity that must appear in the CbC report:

• All entities included in consolidated financial statements
• Permanent establishments (listed separately from head office)
• Dormant entities and special purpose vehicles
• Newly acquired entities (even mid-year acquisitions)

Assign each entity to its tax jurisdiction of residence. For dual-resident entities, apply the relevant treaty tie-breaker rules and document your analysis.

Step 3: Establish Data Collection Framework

Appoint a CbCR project lead (typically in Tax or FP&A) to coordinate across subsidiaries. Establish:

• Data source policy: Will you use consolidation packages, statutory accounts, or management accounts? Choose one approach and apply consistently.
• Submission deadlines: Build in buffer time before the filing deadline.
• Standardized templates: Ensure local teams understand OECD data definitions.

Step 4: Collect and Validate Table 1 Data

For each jurisdiction, gather the ten required data elements:

1. Revenues (unrelated and related): Map each revenue stream to its counterparty. Remember: intercompany dividends are excluded from related-party revenue.
2. Profit (loss) before tax: Use separate entity accounts. Exclude dividends received from other constituent entities.
3. Income tax paid (cash) and accrued (current year): Keep these separate. Include withholding taxes in "paid."
4. Stated capital and accumulated earnings: From balance sheet at year-end.
5. Employees: Choose FTE or headcount and apply consistently. Document contractor treatment.
6. Tangible assets: Physical assets at net book value. Exclude cash, securities, and intangibles.

Step 5: Complete Table 2 Entity Listing

List all constituent entities by tax jurisdiction with:

• Legal entity name
• Jurisdiction of incorporation (if different from residence)
• Main business activity code (OECD codes 1-13)

Validation check: Cross-reference Table 2 against your consolidation perimeter. Every entity must appear—even if dormant.

Step 6: Draft Table 3 Explanations

Review Table 1 for any data that might appear anomalous. Draft explanations for:

• Low effective tax rates (explain incentives, credits, losses)
• High profit/low employee jurisdictions (IP holding, passive income)
• Large related-party revenue percentages (centralized service models)
• Significant year-on-year changes
• Data source methodology and currency conversion approach

Step 7: Internal Review and Consistency Check

Before filing, verify:

• Arithmetic accuracy: Total revenue = related + unrelated for each jurisdiction
• Cross-table consistency: Entities in Table 1 match Table 2 listings
• Documentation alignment: CbCR characterizations match Master File and Local File narratives
• Year-on-year reasonableness: Large changes are documented
• Currency consistency: Same conversion methodology throughout

Step 8: Format and Submit

Convert the report to the required format (typically XML per OECD schema) and submit to the relevant tax authority by the deadline—generally 12 months after fiscal year-end (US: with income tax return).

Post-filing: Retain working papers documenting data sources, calculations, and Table 3 rationales. These support audit defense if authorities raise questions.

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Data Collection Best Practices

Accurate CbCR preparation starts with a robust data collection process.

Centralize Data Collection

Assign a CbCR Project Leader (typically in Tax or FP&A) to coordinate information from subsidiaries:

1. Provide clear instructions to local units on OECD data definitions
2. Pull data directly from the consolidation system (in local currency) to populate Tables 1–3
3. Establish submission deadlines with sufficient buffer before filing
4. Use standardized templates for local entity submissions

Data Integrity Controls

CbCR data does not need to reconcile to consolidated financial statements—OECD explicitly acknowledges this. CbCR includes intra-group revenues (which are eliminated in consolidation), and data sources may differ from GAAP consolidation packages. Instead, focus on these validation checks:

Consistent Methodology

Apply the same rules across all entities and years:

• Choose one employee counting approach (headcount vs. FTE; inclusion/exclusion of contractors) and apply consistently
• Apply one exchange rate method (e.g., average rate for P&L, closing rate for balance sheet)
• Document accounting policies (IFRS, local GAAP) used for profit and asset measurements
• Explain your methodology in Table 3—this is particularly important for employee counting and data sources

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Common CbCR Errors and How to Avoid Them

The OECD has published guidance on common errors that MNEs make when preparing CbC reports. Understanding these pitfalls is essential for audit-ready preparation.

Data Definition Errors

Error 1: Revenue Misclassification

The Mistake: Failing to distinguish unrelated-party vs. related-party sales correctly. All intercompany receipts (except dividends) should be in Related Revenues; third-party sales in Unrelated.

Common Issues:

• Including intercompany management fees in "unrelated" revenue
• Excluding royalty income from either column
• Double-counting items across columns

The Fix: Map each revenue stream to its counterparty before populating. Create a revenue classification checklist and have finance teams validate before submission.

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Error 2: Employee Count Inconsistencies

The Mistake: Using different counting methods across entities—some report headcount, others FTE, some include contractors while others exclude them.

OECD Flexibility: The OECD allows employee numbers to be reported as FTE, headcount, or another reasonable basis. Independent contractors may be included if that reflects how the entity operates. The key requirement is consistency.

The Fix:

• Choose one approach (headcount vs. FTE; include vs. exclude contractors) and apply it uniformly
• Document your methodology in Table 3
• Average over the year using a consistent calculation
• Apply the same approach across all jurisdictions and years

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Error 3: Tangible Asset Scope

The Mistake: Including cash, short-term investments, or intangible assets under "Tangible Assets."

OECD Definition: Net book value of physical assets (property, plant, equipment, inventory, etc.), excluding cash, cash equivalents, marketable securities, and intangible assets.

The Fix: Extract tangible assets directly from balance sheet classifications. Verify that financial assets and IP are excluded.

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Error 4: Tax Paid vs. Accrued Confusion

The Mistake: Netting paid and accrued taxes, or omitting withholding taxes from "Cash Tax Paid."

OECD Requirement:

• Tax Paid (Cash): All cash taxes actually paid during the year, including withholding taxes remitted by other parties
• Tax Accrued: Current-year income tax expense only (excludes deferred taxes)

The Fix: List them separately. Tax Paid should match cash flow statement; Tax Accrued should match current tax expense line (excluding deferred).

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Error 5: Profit Basis Differences

The Mistake: Using adjusted profit definitions (e.g., removing permanent differences or currency gains) or failing to exclude intra-group dividends.

OECD Requirement: Pre-tax profit should be based on separate entity financial statements, including extraordinary items. Critically, it must exclude dividends received from other constituent entities (to avoid double-counting). Firms using fair-value accounting report those figures without adjustment.

The Fix: Use book profit per separate entity financials, but strip out dividends from group companies. If local accounting differs materially, note it in Table 3.

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Error 5a: Including Intra-Group Dividends in Profit

The Mistake: Failing to exclude dividends received from other constituent entities when calculating profit (loss) before tax.

Why It Matters: Including intra-group dividends double-counts income that's already reflected in another entity's profit, distorting the CbCR picture and creating reconciliation issues.

The Fix: Identify all dividend income from group companies and exclude it from the profit (loss) before tax figure. This adjustment should be documented in Table 3 if material.

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Structural and Listing Errors

Error 6: Missing Entities

The Mistake: Omitting dormant subsidiaries, newly acquired entities, or assuming "no activity" means no listing.

OECD Requirement: Every constituent entity in the consolidated accounts must be listed in Table 2—even if it has zero revenue or employees.

The Fix: Cross-reference Table 2 against the consolidation system. New acquisitions, dormant entities, and special purpose vehicles must all appear.

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Error 7: Incorrect Jurisdiction Assignment

The Mistake: Assigning entities to their place of incorporation rather than tax residence, or mishandling dual-resident entities.

OECD Requirement: Entities should be assigned to their tax jurisdiction of residence. For dual-resident entities, apply the relevant treaty tie-breaker rules or competent authority approach (which varies by treaty—place of effective management is one common test, but not universal).

The Fix: Verify tax residency status for each entity. Document tie-breaker analysis for any dual-resident situations, referencing the specific treaty provisions applied.

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Error 8: Activity Miscategorization

The Mistake: Using "Other" when a specific activity code exists, or selecting codes that don't reflect principal business.

The Fix: Review OECD activity code definitions. Select the code that best reflects the entity's primary revenue-generating activity. Use "Other" only when no existing code fits.

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Error 9: Table 3 Omissions

The Mistake: Leaving Table 3 blank or providing only minimal boilerplate.

Why It Matters: Table 3 is your opportunity to explain anything that might otherwise trigger an inquiry. Blank Table 3 + anomalous data = audit flag.

The Fix: Review Table 1 for any ratios or figures that might appear unusual. Draft explanations for:

• Low effective tax rates (tax incentives, R&D credits, loss carryforwards)
• High profit/low employee jurisdictions (IP holding, passive income)
• Large related-party revenue shares (centralized service models)
• Any aggregation or rounding approaches used

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CbCR Filing Deadlines by Jurisdiction

Filing deadlines vary by jurisdiction but typically follow the OECD-recommended 12-month period after fiscal year-end.

Notification Deadlines: Many jurisdictions require constituent entities to notify tax authorities of UPE identity and filing entity within a specified period (often before year-end). Missing notification deadlines can trigger penalties even if the CbCR itself is filed on time.

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Secondary Filing Mechanisms

When Backup Filing Applies

The OECD model recognizes secondary filing routes when the UPE cannot file as expected:

Surrogate Parent Filing is triggered when:

• The UPE's residence country has no CbCR law or no exchange agreement
• No competent authority agreement for CbC exchange exists between the UPE's country and the concerned jurisdiction
• A "systemic failure" (repeated non-exchange) is notified by the UPE's jurisdiction

In these cases, a local constituent entity must file an equivalent CbCR locally.

Coordination Requirements

Companies should coordinate with their UPE and local counsel to determine if surrogate or local filing is necessary in each country of operation. This is particularly relevant for:

• Groups with UPEs in non-OECD jurisdictions
• Newly acquired subsidiaries in jurisdictions without existing exchange agreements
• Situations where exchange mechanisms have been suspended

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Using CbCR Proactively for Risk Assessment

Smart MNEs use CbCR as an internal risk management tool before filing.

Pre-Filing Self-Assessment

Before submission, analyze your own CbC data for patterns that might trigger inquiry:

Compute Key Ratios:

Identify Outliers: If any jurisdiction's ratios deviate significantly from group averages or industry norms, prepare Table 3 explanations proactively.

Documentation Alignment

Ensure CbCR data is consistent with Master File and Local File narratives:

• If the Master File describes Entity X as a "limited-risk distributor," its CbCR profit margin should reflect that characterization
• Discrepancies between CbCR data and TP documentation invite scrutiny
• Cross-reference before filing

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EU Public Country-by-Country Reporting

A Separate Regime

In addition to confidential CbCR exchanged between tax authorities, the EU has created a public CbCR regime (Directive 2021/2101) requiring certain MNEs to publicly disclose country-level data.

Who Is Affected:

• All MNE groups (EU-parented or non-EU with EU presence) with consolidated revenue ≥€750 million in each of the last two consecutive financial years
• Groups with subsidiaries or branches in the EU

Effective Date: Financial years beginning on or after 22 June 2024. For calendar-year groups, the first report covers FY 2025 and must be published by end of 2026. The Commission's implementing regulation on XHTML/iXBRL format applies to reports for financial years starting on or after 1 January 2025.

What Must Be Disclosed Publicly

Per Directive 2021/2101, required disclosures include:

Key Scope Rules:

• Separate disclosure required for each EU Member State (not aggregated EU/EEA)
• Separate disclosure for jurisdictions on the EU list of non-cooperative jurisdictions (Annex I) and certain Annex II jurisdictions
• All other jurisdictions may be aggregated into a single line

Public CbCR vs. Tax CbCR Comparison

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CbCR and Pillar Two: The GloBE Connection

Why CbCR Matters for Pillar Two

The OECD's Pillar Two rules (Global Anti-Base Erosion, or GloBE) establish a 15% global minimum tax for large MNEs. CbCR data plays a significant role in this regime—not as the definitive calculation basis, but as an initial screening mechanism and transitional tool.

Transitional CbCR Safe Harbour

For fiscal years beginning before 2027, Pillar Two includes transitional safe harbour rules that allow qualifying groups to avoid detailed GloBE calculations in certain jurisdictions. These safe harbours rely on Qualified CbC Report data combined with Qualified Financial Statements.

Under the transitional rules, a jurisdiction may be exempt from top-up tax if it meets one of three tests based on CbCR-derived data:

• De minimis test: Revenue and profit below specified thresholds
• Simplified ETR test: Effective tax rate (calculated from CbCR data) meets or exceeds a transitional rate
• Routine profits test: Profit below the substance-based income exclusion

Beyond the Transitional Period

Even after transitional safe harbours expire, CbCR data provides tax authorities with an initial view of where Pillar Two issues may arise. Jurisdictions showing low effective tax rates in CbCR will naturally attract scrutiny for GloBE purposes.

Practical implications:

• Ensure CbCR data sources and methodologies are well-documented—Pillar Two may require similar data at greater granularity
• Review jurisdictions flagged as "low ETR" in CbCR for potential Pillar Two exposure
• Consider whether CbCR explanations in Table 3 (e.g., tax incentives) will remain relevant under GloBE rules

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Penalties and Consequences of Non-Compliance

The Stakes for CbCR Filing Failures

Failure to file CbCR—or filing inaccurate reports—carries significant consequences that extend beyond monetary penalties.

Financial Penalties

Penalty structures vary by jurisdiction, but common approaches include:

• Fixed penalties per day or per report: Some jurisdictions impose escalating daily penalties for late filing
• Percentage-based penalties: Calculated as a percentage of group revenue or taxable income
• Per-entity penalties: Separate penalties for each constituent entity that fails to comply

In the United States, penalties under IRC §6038A and related provisions can be substantial. Other jurisdictions have similarly meaningful penalty regimes—Panama, for example, has imposed penalties exceeding $100,000 for CbCR failures.

Audit and Reputational Risks

CbCR failures signal broader compliance issues to tax authorities. Groups that miss CbCR deadlines or file incomplete reports may face:

• Heightened audit selection probability: Non-compliance flags the group for broader review
• Reduced credibility in tax controversies: Authorities may question other documentation quality
• Transfer pricing adjustment exposure: Incomplete CbCR means authorities lack context that might otherwise explain unusual results

Best Practices for Compliance

To mitigate penalty risk:

1. Build filing deadlines into tax calendars with sufficient buffer time
2. Track notification requirements separately—many jurisdictions require advance notification of UPE identity
3. Maintain documentation of filing dates, confirmation receipts, and working papers
4. Review local rules annually—penalty regimes and requirements evolve

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Quality Control Checklist

Before filing, verify:

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Related Topics

Documentation Guides:

• Master File Best Practices — Global documentation blueprint
• Local File Best Practices — Entity-level documentation
• Transfer Pricing Documentation Guide — Complete documentation hub

Benchmarking Resources:

• Complete Benchmarking Study Guide — Full methodology
• Common Benchmarking Mistakes — Errors to avoid

Glossary:

• Country-by-Country Report — CbCR definition and requirements
• Master File — Global overview document
• Local File — Entity documentation

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Frequently Asked Questions

Who must file a CbCR?

The ultimate parent entity (UPE) of an MNE group must file a CbCR if the group's consolidated revenue in the preceding fiscal year meets the threshold—typically €750 million (US: $850M, India: ₹6,400 crore). This applies even if no single entity alone meets that amount. If the UPE cannot file (no CbCR law or exchange agreement in its jurisdiction), the group may designate a surrogate parent entity, or local constituent entities may have filing obligations.

Is CbCR data made public?

By default, no. Country-by-country reports are exchanged only between competent tax authorities under strict confidentiality provisions. MNEs should treat CbCR as confidential tax information. However, the EU's separate public CbCR regime (Directive 2021/2101) requires eligible companies—those meeting the €750M threshold in two consecutive years—to publish data separately for each EU Member State on their websites, starting with FY 2025 (for calendar-year filers).

How do tax authorities use CbCR information?

Tax authorities use CbCR primarily for high-level risk assessment, not mechanical adjustments. They compute ratios (profit per employee, effective tax rates, related-party revenue share) to identify potential profit shifting. Anomalous ratios trigger deeper inquiry, but no transfer pricing adjustment can be made solely based on CbCR data—detailed evidence from Master/Local Files and transaction analysis is required.

Can tax authorities use CbCR to make automatic TP adjustments?

No. OECD policy explicitly prohibits using CbCR as a basis for formulaic or mechanical adjustments. CbCR is for risk detection only. If authorities suspect incorrect pricing, they must conduct a full audit using Master/Local Files and transaction-level evidence. Authorities cannot simply increase taxable income because CbCR shows a low ETR in a particular jurisdiction.

What if our CbCR data looks unfavorable?

If a country's data show apparently anomalous results (very high profit with few employees, or very low ETR), the best practice is to explain in Table 3 before filing. Note if the jurisdiction hosts only a financing subsidiary, if profit includes one-time gains, or if tax incentives apply. Proactive transparency reduces the risk that unexplained "red flags" trigger unnecessary audits.

How should we count employees for CbCR?

OECD allows flexibility: you may report employees as FTE, headcount, or another reasonable basis. Independent contractors may be included if that reflects how the entity operates. The critical requirement is consistency—choose one approach (FTE vs. headcount; include vs. exclude contractors) and apply it uniformly across all jurisdictions and years. Document your methodology in Table 3. Round to the nearest whole person only if it doesn't materially distort distribution.

What tangible assets should be included?

Tangible assets means physical business assets at net book value (after depreciation) at year-end: machinery, buildings, equipment, inventory, leasehold improvements, etc. Exclude cash, cash equivalents, marketable securities, and intangible assets (patents, goodwill, software). Use the same accounting method as consolidated financial statements.

What's the difference between "tax paid" and "tax accrued"?

• Tax Paid (Cash Basis): Total cash taxes actually paid during the year, including taxes remitted to local authorities and all foreign withholding taxes paid by third parties on behalf of the entity
• Tax Accrued (Current Year): Current-year income tax expense provision, excluding deferred taxes and uncertain tax provisions

These must be reported separately—do not net them. Tax paid should reconcile to the cash flow statement; tax accrued should match the current tax line in the income tax note.

When is a Table 3 explanation required?

Whenever Table 1 data might be misinterpreted. If any jurisdiction shows unusual ratios (low ETR, high profit/employee, significant losses), explain why. Note any consolidation methodology, short fiscal periods, aggregation approaches, or one-time items. OECD guidance implicitly expects explanations for anomalies—a blank Table 3 combined with unusual data is an audit invitation.

How does CbCR relate to Master and Local Files?

CbCR is the third "pillar" of OECD's documentation standard, alongside Master File (global overview) and Local File (entity-level analysis). Unlike Master and Local Files, CbCR provides only aggregate country-level data—it doesn't explain how prices were set or justify transactions. CbCR signals where examination may be needed; Master and Local Files provide the supporting analysis. All three should be consistent in their characterization of entities and transactions.