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Gearing Up for Country-by-Country Transfer Pricing Reporting 

Tax News Flash
Tax News Flash
Tax News Flash

Gearing Up for Country-by-Country Transfer Pricing Reporting

February 3, 2014

No. 2014-04


Multinational corporations may have to consider additional reporting requirements under the Organisation for Economic Co-operation and Development’s (OECD) initial draft of its revised guidance on transfer pricing documentation and country-by-country reporting. The draft guidance, released on January 30, 2014, proposes enhanced reporting for multinational entities’ global allocation of income, economic activity, and payment of taxes for the countries in which they operate, among other information. Stakeholders have been invited to submit comments to the OECD on the draft proposals by February 23, 2014, with a public consultation expected to follow in March 2014.


This guidance was drafted in response to Action 13 in the OECD’s 15-point Base Erosion and Profit Shifting (BEPS) Action Plan, which addresses tax base erosion and profit shifting by taxpayers. The guidance is intended to replace part of the OECD Transfer Pricing Guidelines. According to the OECD, these proposed reporting requirements would allow tax authorities to conduct better informed transfer pricing analyses.


It will be interesting to see whether Canada formally responds to the OECD’s Action Plan, including its new guidance on transfer pricing documentation and reporting, in the 2014 federal budget to be delivered on February 11, 2014. The government may be considering measures to adopt certain OECD recommendations to meet the tight two-year timeframe outlined as part of the OECD’s Action Plan.




The issues of tax morality and tax transparency have become debates in the public forum and continue to captivate the attention of governments and tax authorities around the world, as well as the OECD, corporate executives and corporate boards of directors. As governments look to recoup lost revenues from the economic downturn, a large number of countries are considering, or are in the process of implementing, substantial reforms of their tax systems. As a result, governments seeking to strengthen a weak fiscal position have increasingly focused on tax payable by companies.


The OECD’s BEPS Action Plan, which includes recommendations for establishing international coherence of corporate income taxation, greater transparency and updated transfer pricing guidelines, was presented at a G-20 meeting on July 19, 2013. The plan makes 15 recommendations that focus on key areas including the digital economy, hybrid mismatch arrangements, controlled foreign corporation rules, excessive intercompany interest payments, harmful tax practices, treaty abuse, avoidance of permanent establishment status, transfer pricing, aggressive tax planning, and greater transparency and disclosure. The Action Plan has various working groups that will address these issues.


For further details, see TaxNewsFlash-Canada 2013-27, “OECD Action Plan Could Signal a Shift in the Global Tax Landscape [PDF 35Ko]”.


In July 2013, Finance Minister Flaherty announced he supports the Action Plan and will encourage the G-20 to provide further leadership in developing a cohesive international approach to address these issues. In the 2013 Canadian federal budget, the government introduced legislation for stricter foreign reporting requirements. Prime Minister Harper announced in June 2013 that Canada will adopt new mandatory reporting standards for payments made to domestic and foreign governments by Canadian companies in the extractive sector. The Department of Finance released a Consultation Paper on treaty shopping in August 2013 and sought input on its suggested solutions to combat what it describes as the detrimental effects of treaty shopping (see TaxNewsFlash-Canada 2013-43, "New Treaty Shopping Rules — Should Canada “Wait and See”?" [PDF 52Ko].)




In proposing this draft, the OECD states that its objectives are to:

  • Provide tax administrators with sufficient information to conduct an informed assessment of the taxpayer’s transfer pricing and to conduct a thorough transfer pricing audit in their jurisdiction
  • Ensure taxpayers are giving “appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises” and in preparing their tax returns.


The OECD says it is seeking comments as to whether there are other standard forms and questionnaires that need to be developed in accordance with Action 13 of its Action Plan and when it might be appropriate for tax authorities to share their risk assessment with taxpayers.


OECD recommends two-tiered structure


The OECD’s draft guidance recommends a two-tiered reporting regime to present a comprehensive picture of a multinational entity’s global and local operations through the preparation of both a master file and local file.


Under the OECD’s suggested approach, a master file would be prepared for the multinational group with:

  • The group’s organizational structure
  • A description of the group's business, including the title and country of the principal officers of each of the 25 most highly compensated employees in the business line
  • A description of the group's intangibles and intercompany financial activities
  • A description of the group's financial and tax positions including country-by-country information regarding the group’s global allocation of profits, taxes paid, and other indicators such as:
    • Place of effective management
    • Business activity
    • Revenue
    • Earnings before tax
    • Income taxes paid to country of organization
    • Income taxes paid to all other countries
    • Withholding taxes paid
    • Stated capital and accumulated earnings
    • Number of employees
    • Total employee expenses
    • Tangible assets
    • Intercompany payments of royalties, interest, and service fees.


In addition, each local file would document the local taxpayer’s material transfer pricing positions with its foreign affiliates to demonstrate the arm’s-length nature of those positions. The local file would contain this comparable analysis.


Compliance issues


The OECD draft also identifies the following issues that countries would have to consider under the proposed guidance:


  • Timing  The OECD recommends that countries implement a contemporaneous documentation requirement for both the master and local files. Multinational entities would be responsible for preparing the master file and the local file by the date of the filing of the tax return to the extent that the relevant country-by-country data is available. The documentation would also confirm the arm’s-length nature of the transfer pricing position existing at the time of the filing of the tax return.
  • Materiality  The OECD draft recognizes the burden potentially imposed by compliance requirements and recommends the establishment of materiality thresholds that would allow for the documentation of the most important transfer pricing positions. The OECD draft states that such materiality thresholds take into account factors such as the size and nature of the local economy, the group’s relative importance to the local economy, and the size and nature of the local operating entities, in addition to the overall size and nature of the group.
  • Document retention  The OECD draft suggests that documentation should be retained for a “reasonable period of time” consistent with the requirements of domestic law at either the parent company or local entity level.
  • Frequency of updates The OECD draft recommends reviewing the factual information in the master and local files on an annual basis, and updating when changes have taken place. To simplify compliance burdens, as long as the operating conditions are unchanged, comparable sets would be refreshed every three years, although the financial results for the comparables would be updated annually.
  • Language requirements The OECD recommends that the master file should be generally be prepared in English and the local file in the local language.
  • Penalties  The OECD calls for a “measured approach” to any associated penalty regime with leniency for taxpayers that demonstrate a good faith effort to produce reliable documentation.
  • Confidentiality  The OECD calls on countries to maintain confidentiality (e.g., not expose trade secrets).
  • Benchmarking  In conducting benchmarking analyses, the OECD recommends that multinational entities should use local comparables over regional comparables, where available.


KPMG observations


One favorable recommendation in the draft guidance would allow companies with stable operating conditions to refresh their comparables sets only every three years. The draft would still require an annual updating of the comparable financials, but the three-year refresh recommendation could be an important step in controlling the costs of documentation.


The OECD draft also contains welcome recommendations on the issue of materiality affecting the compliance obligations of taxpayers, which has on occasions been an issue impacting the scope and administrative burden associated with some Canadian transfer pricing audits.


Canadian taxpayers are already subjected to certain disclosure requirements that are generally aligned with the OECD’s stated objectives of Action 13 of the BEPS Action Plan, notably in the transfer pricing documentation requirements and the filing of forms T106, “Information Return of Non-Arm's Length Transactions with Non-Residents”, and T1134, “Information Return Relating To Controlled and Not-Controlled Foreign Affiliates”. However, the OECD draft clearly contemplates much more detailed disclosures of a taxpayer’s international structure and affairs. In a Canadian context, and assuming Finance follows the same path as the other OECD member states, those additional disclosure requirements will need to be reflected in specific amendments to provisions of the Act and changes to CRA administrative pronouncements in the area of transfer pricing.


With the very likely adoption of increased disclosure requirements in Canada along the lines of the OECD’s country-by-country reporting recommendations, it also remains to be seen how the CRA will gear-up resources to process all this additional “big picture” information and use it in the conduct of Canadian transfer pricing audits. Regardless of Canada’s position on this issue, there will likely be an increase in controversy as tax authorities around the world, effectively competing for the same dollars, will be equipped with information to more efficiently conduct thorough transfer pricing audits.


We can help


Your KPMG adviser can help you assess the potential effect of the OECD’s draft guidance on your business, and to prepare for forthcoming changes to the international tax landscape. For more details on these developments and their potential impact, contact your KPMG adviser or one of the following members of our transfer pricing team:


David Francescucci
National Leader, Transfer Pricing and Value Chain Management


Iain MacIntosh
Partner, Leader Tax Transparency


Michael Glaser

Partner, Transfer Pricing Tax


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Information is current to February 3, 2014. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.


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