Key Takeaways
- The master file describes the group's worldwide transfer pricing framework; the local file proves that a single entity's intercompany prices are arm's length.
- Most EU jurisdictions require both files for groups exceeding €50M in consolidated revenue, though thresholds vary by country.
- Filing the master file late or incomplete can trigger penalties ranging from €25,000 per year (Netherlands) to a reversal of the burden of proof (Germany).
- The local file must be available at the time the corporate tax return is filed, not months later when the tax authority asks for it.
What is Master File / Local File?
The split matters most during a transfer pricing audit or a statutory audit where the auditor evaluates uncertain tax positions. A tax authority that opens an enquiry will request the local file first because it contains the comparability analysis and the arm's length justification for the transactions booked in that jurisdiction. If the local file references group-wide policies without substantiating them locally, the tax authority will then request the master file and compare the two for consistency. OECD TPG 5.18 states that the master file should provide "a blueprint" of the multinational's transfer pricing practices, while 5.22 requires the local file to supplement that blueprint with transaction-specific evidence. When the two files contradict each other (the master file describes a cost-plus method for management fees, but the local file applies a transactional net margin method), the inconsistency gives the tax authority grounds to reject the documentation and apply its own adjustment. For the auditor, ISA 540.13 requires evaluation of the methods management uses to develop accounting estimates, and a transfer pricing provision based on inconsistent documentation is an estimate the auditor cannot accept at face value.
Side-by-side comparison
| Dimension | Master file | Local file |
|---|---|---|
| Scope | Entire multinational group | Single local entity |
| Content focus | Organisational structure, group transfer pricing policies, allocation of income, intangible ownership, intercompany financial activities | Entity-specific intercompany transactions, comparability analysis, selection of transfer pricing method, financial data |
| Who prepares it | Group parent or central tax function | Local entity (often with input from the group) |
| Primary audience | Any tax authority in any jurisdiction where the group operates | The tax authority of the specific jurisdiction where the entity files |
| Update frequency | Reviewed annually; updated when the group structure, policies, or intangible ownership changes materially | Updated annually to reflect the current-year transactions, benchmarking, and financial results |
| Typical length | 30–80 pages for a mid-market group | 20–60 pages per entity, depending on the number of intercompany transactions |
Decision rule: Prepare the master file to give every tax authority the same group-wide picture. Prepare the local file to defend each entity's specific intercompany prices in its own jurisdiction.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production group, FY2025, revenue €67M, IFRS reporter. Rossi owns a German distribution subsidiary, Rossi Vertrieb GmbH (revenue €22M, of which €18M originates from purchases of finished goods from the Italian parent). The group also charges Rossi Vertrieb a management fee of €0.4M per year.
Step 1 — Prepare the master file
The group tax team in Milan documents Rossi's organisational structure (parent in Italy, distribution subsidiary in Germany, logistics subsidiary in Austria), its transfer pricing policy for intercompany goods (cost plus 8%), its management fee policy (cost-based allocation using headcount), and its intangible ownership (all trademarks and recipes held by the Italian parent).
Step 2 — Prepare the local file for Rossi Vertrieb GmbH
The local tax advisor documents the €18M intercompany goods purchases and the €0.4M management fee. The local file contains a functional analysis of Rossi Vertrieb (limited-risk distributor bearing no inventory risk) and a benchmarking study identifying comparable European distributors with operating margins between 2% and 5%. Rossi Vertrieb's actual operating margin of 3.1% falls within the interquartile range.
Step 3 — Cross-reference consistency
The local file's cost-plus-8% policy description must match the master file. The management fee methodology described in the master file must align with the local file calculation.
Conclusion: the master file gives German (and any other) tax authorities the group context, while the local file proves Rossi Vertrieb's 3.1% margin falls within the arm's length range. If the practitioner had prepared only the local file, the German tax authority could invoke §162(3) AO and shift the burden of proof onto Rossi Vertrieb.
Why it matters in practice
- Groups frequently prepare the master file as a static document recycled from year to year without updating the income allocation tables, intangible ownership section, or intercompany financing arrangements. OECD TPG 5.16 requires the master file to provide an "overview of the MNE group" that is current. A master file that still references a subsidiary disposed of two years ago signals to the tax authority that the documentation was not genuinely maintained, undermining the credibility of the local file it supports.
- Local files often contain a benchmarking study performed once (at the time the transfer pricing policy was set) and never refreshed. Most EU jurisdictions expect the benchmarking to be updated at least every three years, with financial data of comparables refreshed annually. A stale benchmark that no longer reflects current market conditions exposes the entity to an adjustment based on the tax authority's own, more recent comparable set. OECD TPG 3.80–3.82 addresses the need for comparable data to reflect the conditions during the period under review.
Related terms
Frequently asked questions
When is the master file due?
Deadlines vary by jurisdiction. In the Netherlands, the master file must be available when the corporate tax return is filed (typically five months after year end, extendable to twelve). In Germany, GAufzV §4 requires documentation within 30 days of a tax authority request. OECD TPG 5.21 recommends completion by the tax return filing date of the ultimate parent entity.
Do small companies need a master file and local file?
Most jurisdictions exempt groups below a revenue threshold. The Netherlands applies the documentation obligation to entities with intercompany transactions exceeding €500K per category. Germany applies it to entities with transactions above €6M for goods or €600K for services (GAufzV §2). Below these thresholds, simplified documentation may suffice, but maintaining a local file remains advisable because the burden of proof shifts to the taxpayer if the arm's length principle is challenged.
What is the relationship between the master file and country-by-country reporting?
The master file and the country-by-country report (CbCR) are two of the three tiers of OECD BEPS Action 13 documentation. The CbCR provides aggregate jurisdiction-level data (revenue, profit, tax paid, employees) for groups above €750M consolidated revenue. The master file supplies the qualitative context behind those numbers; the local file adds entity-level transaction detail.