OECD Documentation: The Three-Tier Architecture

Chapter 12 of the OECD Guidelines is the documentation chapter. It sets out what the taxpayer must document, in what form and by when, so that the price it charged for a controlled transaction can be shown to be arm’s length. In the current Guidelines the chapter is organised around the three-tier architecture of BEPS Action 13 — the master file, the local file and the country-by-country report — but the underlying duty is older and simpler: keep a contemporaneous record that explains the method, the comparables and the result.

The chapter at a glance

Subject	What it covers
The documentation duty	The obligation to prepare and keep documentation showing that the transfer prices are consistent with the arm’s length principle, in line with the demonstration standard in Chapter 1
Contemporaneous preparation	The documentation must exist by the time the prices are set and the return is filed — not assembled after an adjustment is proposed
The master file	The group-level file: the ownership structure, the intangibles held, the functions performed and the overall transfer pricing policy of the multinational group
The local file	The entity-level file: the controlled transactions, the selected method and its rationale, the comparables used, the adjustments made and the final price
The country-by-country report	The reporting on revenue, profit, taxes, employees and assets by jurisdiction, the exchange mechanism between competent authorities
The penalty-protection role	How the file operates as the defence against an adjustment and, where local law ties it, the shield against the documentation penalty

What lives in each tier

• The master file. The group-level picture: the ownership structure, the intangibles held and how they are exploited, the functions performed and the overall transfer pricing policy of the group. It is cited whenever an examiner tests whether the local file is consistent with the group. See the master file guide.
• The local file. The entity-level record: the controlled transactions, the method and why it was chosen, the comparables and their selection, the adjustments and the final result. It is cited on every documentation review. See the local file guide.
• The CbCR. The group-wide picture by jurisdiction — revenue, profit, taxes, employees and assets — exchanged between competent authorities and used for the risk assessment that feeds an examination. See the CbCR guide.

The tiers are not interchangeable: the master file explains the group, the local file explains the entity’s price, and the CbCR gives the map. A defensible file has all three, consistent with each other.

The contemporaneity rule

In paraphrase, the provision that the documentation be in existence before the price is determined and the return is filed is the one examiners cite most. A file prepared in response to an adjustment does not satisfy the duty, and it loses its protective role. This is the same logic as the contemporaneous-documentation standard in the working guide, and it is the rule the penalty question turns on.

The penalty-protection role

The file is the defence against the adjustment and, where local law ties the penalty to the documentation, the shield against it. The penalty-protection logic runs in both directions: a contemporaneous, complete file protects the price and the penalty position; a file assembled after the fact loses both. The demonstration standard the file must satisfy is the Chapter 1 standard — the file exists to show the price is arm’s length, and it is tested against that standard.

What it means in practice

The reader’s map maps Chapter 12 onto Indian law directly:

OECD concept	Indian provision
Documentation (Ch. 12)	Rule 10D / 10E / 10DA / 10DB, s.92D/92E

India’s Rules 10D (local file), 10E (CbCR) and 10DA/10DB (master file) are the local implementation of the three tiers, and the contemporaneous condition is the one the penalty stack enforces. The working workflow — what to prepare, by when, and how the tiers fit together — is covered in the TP documentation guide.

Where this takes you

• The documentation workflow in practice: the TP documentation guide.
• The three tiers in detail: master file, local file and CbCR.
• The demonstration standard the file must satisfy: OECD general principles.
• The method the file documents: OECD method selection.