Our guide to documentation requirements covers who has to document, the deadlines and the penalties. This article looks inside the two files themselves: what each one contains, where the two overlap, and the German details that decide whether an auditor accepts the file.
Two files, two perspectives
The OECD Transfer Pricing Guidelines split documentation into three tiers at paragraph 5.16: a master file with standardised information for all group members, a local file on the material transactions of the local taxpayer, and the country-by-country report. The first two are narrative documents. The third is a data return, and it only applies to groups with consolidated revenue of EUR 750 million or more in the preceding fiscal year.
The difference between the first two is one of altitude. Paragraph 5.18 describes the master file as a high-level overview of the group's business, its overall transfer pricing policies and its global allocation of income, and warns against "exhaustive listings of minutiae". Paragraph 5.22 then sets the local file against it: it provides "more detailed information relating to specific intercompany transactions". The master file explains how the group makes money. The local file shows that this taxpayer, in this country, was paid at arm's length for its part.
What goes into the master file
Paragraph 5.19 calls the master file a "blueprint" of the group and sorts its content into five categories: organisational structure, description of the business, intangibles, intercompany financial activities, and financial and tax positions. Annex I to Chapter V turns these into a template.
Germany adopted that template almost word for word. The annex to section 5 of the German Transfer Pricing Documentation Regulation (GAufzV) lists 18 items, among them:
- a chart of the legal and ownership structure and the geographic spread of group companies and permanent establishments
- the supply chains for the five products or services with the highest revenue, plus every other product or service above 5 percent of group revenue; a meaningful chart is enough
- a summary functional analysis of each group company's main contributions to value creation
- the group's overall strategy for intangibles, a list of the relevant intangibles and their legal owners, and the transfer pricing policy for research and development and intangibles
- how the group is financed, which companies run central financing or cash management, and the transfer pricing policy for intra-group financing
- the consolidated financial statements where prepared, and existing unilateral advance pricing agreements and rulings
Two sentences in the German rules make the file more workable than it first looks. Section 5(2) GAufzV asks for reasonable business judgement, so that the file serves its purpose with appropriate effort. And where the annex uses vague terms such as "important" or "significant", the company has its own room for judgement, provided it applies it consistently across countries, on disclosed criteria and from year to year.
What goes into the local file
The German name for the local file is the "country-specific, company-related documentation" in section 4 GAufzV. In the terms of the Fiscal Code, it is the description of the transactions (Sachverhaltsdokumentation) together with the proof that their terms were arm's length (Angemessenheitsdokumentation). Alongside it, section 90(3) sentence 2 no. 1 of the Fiscal Code now requires an overview of the transactions, the transaction matrix, which in an audit is due unprompted together with the master file; the regulation itself does not yet mention it. Section 4(1) GAufzV builds the local file in four blocks:
- General information on shareholdings and other related-party links, the organisational and operational group structure including permanent establishments, management and organization, and business activities and strategy, including changes to them.
- The related-party transactions themselves: their type and volume, the underlying contracts, and the material intangibles the taxpayer owns and uses or licenses out.
- The functional and risk analysis: functions performed, risks assumed, main assets used, contract terms, business strategies and market conditions, plus a description of the value chain and the taxpayer's contribution to it.
- The transfer pricing analysis: when the price was set, what information was available and used at that time, the method applied and why it was chosen, the calculations, and the comparable transactions used.
Section 4(2) adds records that depend on the case: set-off arrangements, cost contribution arrangements, mutual agreement and arbitration procedures of other states and foreign advance rulings, price adjustments, research and development connected with function changes, and, where the taxpayer reports a tax loss from related-party dealings in more than three consecutive years, the causes of the losses and the steps taken to end them.
Where German law adds its own rules
On the structure, Germany follows the OECD closely. On five details it goes further or gets more specific.
The master file threshold is measured per company, not per group. Section 90(3) of the Fiscal Code requires the group overview unless the company's own turnover in the previous financial year was below EUR 100 million. In a group with EUR 2 billion of revenue, a German subsidiary that turns over EUR 60 million does not need to prepare a master file. A EUR 120 million German company in a mid-sized group does. And a "multinational group" already exists where a single company has a permanent establishment in another country.
The master file arrives before anyone asks for it. Under section 90(4) of the Fiscal Code, in a tax audit the master file, the transaction matrix and the records of extraordinary transactions must be submitted within 30 days of notification of the audit order, without a separate request. The local file is due within 30 days once it is requested; in justified cases the deadline can be extended.
The group's file can be used, but it has to be completed. Section 5(1) GAufzV lets the German company rely on a master file prepared by another group company, supplemented where it falls short of the annex.
The language is German unless you apply for an exception. Section 2(5) GAufzV requires German, and section 5(1) confirms this applies to the master file too. The tax office can allow another language on application. The application can be made before the file is written, and at the latest immediately after the records are requested. Because the master file now has to be submitted unprompted, the application is best made before the audit order arrives. Many group master files are in English, so this is a routine step.
Database searches must be reproducible. Section 4(3) GAufzV is the most technical sentence in the regulation. A taxpayer who uses databases to set transfer prices must fully disclose the search strategy, the search criteria, the search result and the selection carried out outside the database. The whole search process must be traceable and checkable at the time of the audit, which may be years later. The configuration of the database used for the search must be fully documented. The auditor's right of access to electronic data under section 147(6) of the Fiscal Code applies accordingly.
Master file and local file side by side
How often both files have to be updated
The OECD recommends at paragraph 5.38 that the master file and the local file be reviewed and updated every year. For the local file it offers one simplification: as long as the operating conditions stay the same, tax administrations may allow the database search for comparables to be updated every three years rather than annually. The comparables' financial data should still be updated each year.
In practice, that makes the local file a document with two different speeds. The narrative can often be rolled forward. The numbers cannot: the margins of the comparable companies change every year, and the interquartile range with them. This is where the benchmarking study behind the file is won or lost, and where the question of how much search is enough comes up again.
What this means for the file you hand over
A master file can be good enough at a high level. A local file cannot, because section 4(3) GAufzV turns every database study into evidence. An auditor must be able to retrace the search years later: the same strategy, the same filters and the same rejection reasons, on a documented database configuration. If the benchmarking cannot be traced, it risks being disregarded, and where the records as a whole are essentially unusable, section 1(1) sentence 4 GAufzV treats them as not prepared, with the estimation and surcharges of section 162(3) and (4) of the Fiscal Code.
That is the gap Benchmarking Pro was built to close. It covers 50,000+ listed and 500,000 private companies in more than 100 countries, and every figure carries its source and a full calculation log, so the search strategy, the criteria and the rejection reasons stay documented and traceable. How the transfer pricing module handles coverage across countries is explained in our article on benchmarking database coverage. The same local file is now also read for the global minimum tax, as our article on Pillar Two and transfer pricing documentation shows.
The master file tells the auditor where to look. The local file is what they check.
References
- OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2022 — Chapter V, paragraphs 5.16 (three-tiered structure), 5.18 (master file as a high-level overview; no "exhaustive listings of minutiae"), 5.19 (master file as a "blueprint", five categories), 5.22 (local file: "more detailed information relating to specific intercompany transactions"), 5.38 (annual review and update; database searches every three years with annual financial data), 5.52 (EUR 750 million country-by-country threshold); Annex I (master file) and Annex II (local file) to Chapter V
- German Fiscal Code (Abgabenordnung) — section 90(3) (transaction matrix, description of transactions, arm's length documentation; group overview unless prior-year turnover below EUR 100 million; definition of a multinational group), section 90(4) (30 days after a request, extendable in justified cases; master file, transaction matrix and extraordinary transactions unprompted within 30 days of the audit order), section 147(6) (data access)
- German Transfer Pricing Documentation Regulation (Gewinnabgrenzungsaufzeichnungsverordnung, GAufzV) of 12 July 2017, Federal Law Gazette I p. 2367 — section 1(1) sentence 4 (essentially unusable records treated as not prepared), section 2(5) (German language; exceptions on application), section 4(1) to (3) (local file content; case-specific records; disclosure of database searches), section 5(1) and (2) (master file; use of another group company's file; reasonable business judgement), annex to section 5 (18 master file items; discretion on indeterminate terms)
Related pages
- Transfer Pricing Benchmarking & TNMM Analysis — the module, net margin indicators and the calculation log on live data
- Who has to prepare transfer pricing documentation? — thresholds, deadlines and penalties
- Transfer pricing database — a guide for tax consultants — what makes a database audit-proof
- Benchmarking database coverage — why country coverage decides the comparables set
- How much search for comparables is enough? — the OECD proportionality standard
- Grounding / Facts — entity definition, data provenance and methodology
