Master File and Local File: Transfer Pricing Documentations in India

For multinational enterprises (MNEs), transfer pricing compliance depends on accurate and structured documentation. The Master File and Local File form the two essential layers, helping businesses demonstrate adherence to both global standards and local tax regulations, while reducing audit and transfer pricing risks.

What Are the Master File and Local File?

Master File

This is a comprehensive document that describes the overall global business of a multinational enterprise group (MNE group), the organizational structure, and business activities, intangibles, intercompany financial activities, and global transfer pricing policies. It provides the tax authorities with the overall understanding of how the group operates and where important value is created.

Local File

This is specific to the local entity within a certain jurisdiction. It details the financial information, the functions, assets and risks, the selected transfer pricing method and application of the method with respect to intragroup transactions of the local entity.

How do Master File and Local File these Two Layers Interlink?

Strategic Alignment

The Master File establishes the strategic context such as global business model, value drivers, intangible assets, and group financing. If the local file materially deviates from the contents in the Master File, additional investigation might get triggered in case of tax scrutiny.

Supporting Audit Trail for Tax Authorities

Tax authorities may begin with the Master File to understand the global structure of an organisation as a whole and then look at the Local File to see how the local entity fits into that overall value chain. This two tier approach facilitates transparency.

Mitigating Overall Transfer Pricing Risk

Together, both documents demonstrate the company’s adherence to global standard documentation and local requirements, while significantly mitigating the risk of penalties, discriminatory treatment, or double taxation. The Master File will help prevent challenges from an overall strategic/value chain perspective, while the Local File will help defend pricing on an individual transaction basis.

Best Practices for Developing Master File and Local File Transfer Pricing Documentation

Start with a clear global business model

The Master File should be created in time as it would serve as a handbook to understand organizational structure, functions, assets, risks, and intercompany transactions for the MNE group as a whole.

Ensure local entities documentation aligns with global narrative

The Local File should have appropriate reference to the group master file, thereby ensuring consistency with the global documentation, link back to the Master File strategy and reference where the local entity fits within this overall model.

Use benchmarking and economic analyses appropriately

The Local File should include comparability analyses or internal benchmark comparisons that correlate to intercompany transactions.

Maintain consistency across documentation

Avoid contradictions between the Master File and Local File. For example, if the Master File states that intangibles are owned in Country A, do not portray the Local File in Country B as having the local entity owning valuable intangibles that are unrelated.

Keep documentation up to date and dynamic

The local file and master file should reflect changes in business models that change or evolve when there are material changes, and make updates to both layers. Examples of such changes include restructurings, acquisitions, new intangibles, or new intercompany services.