Transfer pricing documentation is a fundamental obligation for multinational groups operating in Spain. Since the implementation of the OECD BEPS project, the Master File and the Local File have become essential tools to demonstrate that transactions between related companies comply with the principle of free competition. However, many companies still have doubts about the differences between the two documents and when they are required to prepare them.
In this article we explain to you what each document is, what information they must contain and the key differences that you must know in order to comply correctly with your international tax obligations.
What are transfer prices?
Transfer prices are prices agreed between related companies of a multinational group for transactions such as exchange of tangible and intangible goods, provision of services, transfer of technology or financial transactions. Fiscal law requires these prices to be equivalent to those to be established between independent companies under similar market conditions, which is known as principle of free competition o arm’s length princele.
The aim is to prevent multinational groups from artificially transferring profits from high-taxed countries to low-tax jurisdictions, damaging the tax collection of States where economic value is actually generated.
The three-level documentation system
After the BEPS project (Base Erosion and Profit Shifting) of the OECD, published in October 2015, a transfer pricing documentation system was established in three levels to maintain narrative and quantitative coherence:
- Level 1 – Country by Country Report (CbCR): distribution of figures by jurisdiction (income, taxes paid, employees, tangible assets). Answers the question: how are the benefits distributed among countries?
- Level 2 – Master File (Master Report): a global view of the structure of the group, value chain, intangible assets and internal financing. It answers the question: where is the value created and why is the group structured like this?
- Level 3 – Local File (Local file): detail of each related transaction of the local entity, with applied method, comparable and adjustments. Answers the question: was this particular transaction carried out at market price?
What is the Master File?
The Master File o Maestro Report is a document that provides an overview of the transfer pricing policies of the entire multinational business group. Its objective is that the tax administrations of each country understand the operations, assets and structure of the group as a whole, without going down to the detail of each local entity.
Content of the Master File
Under Spanish law (Article 15 of Royal Decree 634/2015) and OECD guidelines, the Master File should include:
- Description of the group and its structure: legal and operational organisation, evolution of the group, organizational chart with share distribution, data of related entities.
- Business activities: value chain of the main products or services, key functions, risks assumed, assets used, main geographic markets.
- Intangible assets of the group: intellectual property, patents, trademarks, know-how, licensing agreements, R & D strategy, intangible transmissions.
- Financial activities: intra-group financing structures, pricing policies for financial operations, institutions centralizing financial functions.
- Financial and fiscal situation: consolidated financial statements, prior valuation agreements (APAs) in force, relevant tax rulings.
Preparation of the Master File
The Master File is made in a way centralized, normally from the parent or corporate headquarters of the group, and has a strategic and global approach. It should be prepared when the deadline for the declaration of the Company Tax (approximately 25 July of the year following the financial year) ends and be delivered within a period of 10 working days if an inspection request arrives.
What is the Local File?
The Local File o Local Archives is a technical document that details and justifies that the specific transactions carried out by the local entity with its related parties have been made at market prices, in compliance with the principle of free competition.
Content of the Local File
According to article 16 of Royal Decree 634/2015, the Local File must include:
- Description of the local entity: organisational structure, shareholders, main activity, products and services.
- Related transactions: nature, amount and characteristics of each category of transactions with related parties.
- Functional analysis: functions performed, assets used and risks assumed by the local entity in each related transaction.
- Valuation method: selection and application of the most appropriate method (Uncontrolled Comparative Price, Increment Cost, Sales Price, Transactional Net Margin, Result Distribution).
- Comparability analysis: identification of internal or external comparables, adjustments made, sources of information used.
- Financial statements: annual accounts of the local authority and any other relevant financial information.
Preparation of the Local File
The Local File is made in a way Decentralized, jurisdiction by jurisdiction, and has a detailed and transactional approach. It functions as the local company’s “defence dossier” for tax audits.
Key differences between Master File and Local File
|
Appearance |
Master File |
Local File |
|
Approach |
Global (the entire multinational group) |
Local (specific entity in a country) |
|
Preparation |
Centralized from parent or corporate headquarters |
Decentralized, country by country |
|
Objective |
Explain context and global value chain |
Justifying that local operations comply with the principle of free competition |
|
Level of detail |
High level, overview of policies and strategies |
Granular, transaction by transaction |
|
Answering question |
Where is the value created in this group and why is it structured like this? |
Was this particular operation carried out at market price? |
|
Main content |
Strategy, intangibles, organisational structure, group financing |
Detail of local transactions, methods applied, comparable identified |
|
Function |
Contextualize |
Sample |
Who is obliged to prepare this documentation?
In Spain, the following companies are required to prepare the Master File and the Local File:
- They belong to a group with consolidated turnover exceeding EUR 45 million
- They perform. related transactions in excess of EUR 250,000 per operation
- They are involved in specific transactions such as intangible transfers, business reorganisations or divestitures of use of relevant assets
It is essential that both documents maintain narrative and quantitative coherence The tax administrations use automated systems that cross data from the Master File, Local File and Country by Country Report looking for inconsistencies. A discrepancy between what is documented in the Master File (global description) and the Local File (transactional detail) generates automatic alerts in the risk analysis systems of the Tax Agency.
Practical example
Imagine a multinational group based in Spain that has a subsidiary in Germany. The German subsidiary pays royalties to the Spanish parent for the use of a brand.
The Master File explain:
- Who is the legal owner of the trademark
- Where the brand was developed
- What intellectual property strategy the group follows
- Under which general conditions the brands of the group are licensed
The Local File of the German subsidiary shall specify:
- What specific amount you pay for the royalty
- Why this specific amount is free to compete
- Which comparable companies have been identified on the market
- How the chosen valuation method has been applied
- What adjustments have been made to ensure comparability
Without the context of the Master File, the Local File seems arbitrary. Without the detail of the Local File, the Master File is insufficient to defend a position before an inspection.
Penalty regime
Failure to comply with documentary obligations may result in significant penalties:
- No value adjustment: fine of €1,000 for missing data and €10,000 for missing or false data set, with limit of 10% of the amount of related transactions or 1% of the turnover.
- With evaluative adjustment: 15% fine on the amount of corrections made by the Administration.
However, if the documentation is properly prepared and submitted in time, the possible administrative adjustments do not result in the most serious sanctions in the General Tax Act.
Conclusion
The Master File and the Local File are not interchangeable or optional documents for multinational groups with presence in Spain. Each one has a specific function within the transfer pricing documentation system: the Master File contextualizes the overall structure and strategy of the group, while the Local File demonstrates that each specific transaction complies with the principle of free competition.
The key lies in the consistency between the two documents and in preparing them in advance, not when the tax agency’s request comes. The delivery time of only 10 business days after a request does not allow improvisation.
In Afianza We advise multinational groups in the preparation and updating of their transfer pricing documentation, ensuring consistency between Master File, Local File and information obligations such as model 232. Our team of tax advisors specialized in international taxation works in coordination with matrices and subsidiaries to build defensible documentation, updated and aligned with OECD standards and Spanish regulations.
Whether your group is preparing its transfer pricing documentation for the first time or you need to review and improve the existing one, our experts can help you minimize tax risks, avoid sanctions and maintain a transparent relationship with the Tax Administration.
Does your multinational group operate in Spain? Contact the specialists in Afianza transfer prices and ensure compliance with all your documentary obligations.
