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A company should keep a traceable record for every material related-party transaction: the agreement and actual conduct, functions-assets-risks analysis, pricing method, comparable data, calculations, accounting entries, and tax-return outcome. Organize those records around the OECD three-tier framework—a group master file, a jurisdiction-level local file, and, where required, a Country-by-Country (CbC) report—but treat domestic law as controlling. Each country sets its own scope, materiality thresholds, deadlines, language, format, penalties, and retention period.
Start with the three OECD documentation tiers
The OECD framework is the most useful way to structure a transfer pricing audit file, but it is not a universal legal checklist. A tax authority can require additional records, and a company may be exempt from one or more tiers under local rules. Confirm the obligation for each entity, transaction and accounting period.
Master file: the group-wide picture
The master file explains how the multinational group operates as a whole. It should let an auditor understand the group before examining a local transaction. Keep the current and prior versions of:
- The group’s organizational chart, legal entities, tax residences and ownership structure.
- A description of the group’s businesses, markets, strategy, principal value drivers and major restructurings or acquisitions.
- The group’s transfer pricing policies, including how policies are implemented in different jurisdictions.
- Information about important intangibles: legal owners, development locations, contribution by group companies, licensing arrangements and changes in ownership or exploitation.
- Intercompany financing arrangements, treasury functions, guarantees, central cash management and policies for setting interest rates.
- Consolidated financial statements and the group’s tax position, to the extent needed to explain the group context and transfer pricing outcomes.
Tailor the level of detail to local materiality rules. A master file should be complete enough to explain the group’s value chain and policies, but it does not replace evidence about a particular local transaction.
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Local file: the transaction-level proof
The local file connects a local entity’s actual dealings with related parties to its reported arm’s-length result. For each material controlled transaction or category of transactions, retain:
- The local entity’s management structure, organization, business strategy and relevant changes during the year.
- The identity, tax residence and relationship of every material counterparty, plus the jurisdictions involved.
- Transaction descriptions, volumes, values, currencies, payment terms, dates and the agreements governing them.
- A functions, assets and risks (FAR) analysis showing who performs activities, controls economically significant risks, uses important assets and makes key decisions.
- The selected transfer pricing method, why it was appropriate, alternatives considered and rejected, and the tested party where a one-sided method is used.
- Comparable companies or transactions, search strategy, screening criteria, source data, comparability adjustments and the reason the final range was accepted.
- Financial information used in the analysis, segmental accounts where available, and a reconciliation from the tested results to the general ledger, statutory accounts and tax return.
The local file should be reproducible. An independent reviewer should be able to follow the path from contract and business facts to the method, calculations, booked amounts and tax adjustment without relying on undocumented explanations.
Country-by-Country report: the jurisdictional allocation view
For qualifying multinational groups, a CbC report summarizes revenue, profit, taxes paid and selected indicators of economic activity by tax jurisdiction. It complements the master and local files; it is not a substitute for transaction-level support. Scope, filing responsibility, notification rules and deadlines depend on each country’s implementation of the CbC standard.
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| Tier | What it explains | Records to retain |
|---|---|---|
| Master file | Group structure, strategy, intangibles, financing and overall tax position | Group charts, business descriptions, policies, intangible and financing information, consolidated financial and tax data |
| Local file | Why the local entity’s material related-party results are arm’s length | Agreements, transaction data, FAR analysis, method, tested party, comparables, calculations and account/tax reconciliations |
| CbC report | High-level allocation of income, tax and activity across jurisdictions | Filed report, source schedules, jurisdictional data, consolidation adjustments and filing notifications |
Preserve the source evidence behind the files
Keeping only a polished report is risky. Auditors commonly test whether the written analysis reflects what the business actually did and whether the numbers can be reproduced. Preserve source documents in a year-and-transaction index.
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Contracts and evidence of actual conduct
Retain signed intercompany agreements, amendments, statements of work, service descriptions, purchase and sales records, invoices, royalty schedules, loan documents, guarantees and payment evidence. Keep proof of actual conduct—such as delivery records, service tickets, production logs, approval trails and correspondence—when it shows that employees followed, or departed from, the written terms. A contract that does not match operational reality can undermine the analysis.
Accounting and tax support
Keep general-ledger detail, trial balances, cost-pool calculations, allocation keys, segment financial statements and working papers that map transaction data to statutory accounts. Document every reconciliation to the tax return, including foreign-exchange treatment, eliminations, one-off items, reclassifications and year-end true-ups. Retain the source data used to calculate tested-party margins or other pricing metrics, not merely a spreadsheet containing final percentages.
Functional interviews and decision evidence
Document interviews with people who perform or control relevant functions. Preserve role descriptions, reporting lines, delegated authorities, committee minutes, approval matrices and evidence of who made pricing, financing, procurement, product, hiring and risk decisions. The evidence should identify who used assets, managed economically significant risks and had the financial capacity to bear them.
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Retain the written method-selection analysis, assumptions, rejected alternatives, tested-party rationale, database search strategy, search dates, filters, candidate lists, exclusion reasons, comparable financial statements, adjustments and calculation files. Preserve licenses or snapshots needed to show what data was available when the analysis was prepared. If a result falls outside the arm’s-length range, keep the explanation, corrective action and accounting entry.
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Business and governance records
Business plans, budgets, forecasts, pricing decisions, board or committee materials, risk registers, mitigation assignments and delegations of authority can explain why an arrangement operated as it did. HMRC identifies these governance and risk records as useful contemporaneous evidence. They are examples, not an exhaustive worldwide list.
Prior-year continuity and changes
Keep prior-year files and a change log covering reorganizations, new products, altered functions, changed risk control, revised policies, new comparables and material variance explanations. An auditor may ask why a margin, allocation key or counterparty changed even when the current-year report looks internally consistent.
Build an audit-ready record system
A repeatable process reduces the chance that evidence disappears when staff or systems change. Use the following sequence for each reporting year.
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- Map obligations. For every entity and jurisdiction, record whether a master file, local file, CbC report, transaction-specific form or other schedule is required; note thresholds, deadlines, language, format and retention rules.
- Inventory transactions. Reconcile the related-party ledger, intercompany confirmations, invoices, contracts and tax disclosures. Group transactions by economically similar type, but do not combine items that have different functions, risks or pricing drivers.
- Assign owners. Name an owner for each transaction category and each evidence type: legal agreements, operational facts, accounting data, benchmarking and tax filings. Set review and approval dates before the close.
- Capture facts contemporaneously. Conduct functional interviews and collect governance material during the year, rather than reconstructing decisions from memory after an audit notice.
- Prepare the analysis. Document the FAR profile, method choice, tested party, comparables, adjustments, assumptions and calculations. State which facts are measured, estimated or based on management judgment.
- Reconcile and review. Tie the analysis to the ledger, statutory accounts and tax return. Investigate unexplained differences, unusual margins, losses, large year-end entries and changes from the prior year.
- Approve and lock versions. Keep a dated final file plus the underlying source files, reviewer comments, approvals and a log of later amendments. Do not overwrite the version that supported a filed return.
- Test retrieval. Ask someone who did not prepare the file to locate an agreement, reproduce a key calculation and explain the result. Fix broken links, missing permissions or unreadable formats before an authority asks for production.
Retention periods, updates and storage
The OECD does not prescribe one global number of retention years. It says taxpayers should not be required to retain records longer than a reasonable period consistent with domestic law, while recognizing that older material may remain relevant to a later year that is still open. Long-term contracts, historical comparability work and records explaining an acquisition or restructuring may therefore need to be retained beyond the year in which they were created.
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Check the statutory limitation and recordkeeping rules separately for every jurisdiction and year. Apply the longer period where a local rule, an open audit, a tax dispute, a loss carryforward or a long-term arrangement keeps the issue alive. Obtain legal or tax advice before destroying records subject to a preservation notice.
The OECD generally recommends reviewing and updating the master file, local file and CbC report annually. In stable circumstances, a comparable-company search may be refreshed every three years, but the comparable companies’ financial data should still be updated each year. A change in functions, risks, markets, financing, ownership or accounting policy can require a full refresh sooner.
Storage medium is a business choice if the information can be produced promptly in the form local rules require. Use an indexed electronic repository with access controls, version history, source-file retention, calculation dependencies, approvals and a clear naming convention. Check whether the authority requires a local language, a specific electronic format, hard copies or a particular production deadline.
UK example: additional statutory requirements
The United Kingdom illustrates why the OECD framework cannot be treated as a worldwide checklist. HM Revenue & Customs (HMRC) states that businesses must keep records needed to make and deliver a correct and complete tax return. Separate Transfer Pricing Records Regulations 2023 require an in-scope set of UK entities to keep and preserve a master file and local file.
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HMRC says those specified rules apply to corporation-tax accounting periods beginning on or after 1 April 2023 and to income tax from tax year 2024–25. The described scope refers to UK entities in a multinational enterprise group meeting the CbC reporting threshold, together with relevant-person and material-controlled-transaction conditions. Confirm the current legislation and the entity’s facts before concluding that the rules apply.
Businesses outside the prescribed scope still have the general duty to retain documentation that adequately demonstrates arm’s-length pricing. UK dates, thresholds and file requirements should not be generalized to another country.
Compare local regimes before relying on an exception
When more than one documentation route may apply, compare the rules on all of these points:
- Entity and group scope, including revenue or CbC thresholds.
- Covered transaction categories and materiality tests.
- Required master-file and local-file content and the level of local detail.
- Preparation, filing, notification and production deadlines.
- Retention and statutory limitation periods.
- Required language, electronic format and translation rules.
- Penalty, documentation-protection or burden-of-proof consequences of timely preparation.
- Simplifications or exemptions for smaller entities, routine transactions or low-value services.
Use the relevant tax authority’s current rules for each comparison. A group-wide policy can provide consistency, but it should contain a jurisdictional schedule rather than assume that one file satisfies every country.
Common weaknesses that trigger questions
- Paper-only compliance: a report exists, but agreements, calculations or source data cannot be produced.
- Contract-reality mismatch: the agreement assigns risks that the local team does not control or fund.
- Unreconciled numbers: the tested results differ from the ledger or tax return with no bridge.
- Unsupported comparables: the file gives a margin range but not the search strategy, exclusions or adjustments.
- Stale facts: the business changed products, decision makers, markets or financing, but the FAR analysis was copied unchanged.
- Missing governance evidence: no record shows who approved pricing, controlled risk or authorized a major transaction.
- Overbroad retention assumptions: a team applies one country’s deadline or retention period to the entire group.
Correct these gaps by preserving contemporaneous evidence, documenting variances and decisions, and testing whether another reviewer can reproduce the filed result from the stored records.
What to have ready when an audit notice arrives
Prepare an indexed production set that identifies the legal entity, accounting period, transaction category, counterparty and responsible reviewer for every document. Include the applicable master file, local file and CbC materials; agreements and proof of conduct; FAR interviews; benchmarking source data; accounting and tax reconciliations; governance records; prior-year versions; and a schedule of changes or corrective entries. Keep an internal privilege review separate from the factual record, and preserve the original files and metadata while producing copies in the authority’s required format.
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