What is a local file in transfer pricing?
It is the document covering one entity rather than the group. It sets out that entity's controlled transactions, a functional analysis of what it does and which risks it carries, the transfer-pricing method selected and why, the comparables used, and the entity's financial results tested against them. This is the document a local auditor works through line by line, because it is the only one connecting the group's account of itself to the numbers in the local return. Everything in it is meant to be testable against the entity's own records.
What is the difference between a local file and a master file?
Scope. The master file describes the group, its structure, business drivers, intangibles and internal financing, and is filed in several countries, so every administration reads the same account. The local file describes one entity's controlled transactions and tests its results. The two are read together, and the local file is the one tested in detail. A local file repeating the group narrative without the entity's transactions, method and comparables has not done its job, and one that contradicts the group description invites precisely the enquiry documentation exists to prevent.
Our margin came out below the benchmarked range, what now?
Explain the difference in the file, before an auditor asks. A result outside the tested range is not automatically a wrong price. Start-up losses, a one-off cost, an exceptional market year or a change in what the entity does can all put a sound arrangement outside a range built from other companies' results. What matters is that the reason is identified, evidenced from the entity's own records, and written down in the file for that year. The alternative is an auditor finding the gap first and supplying an explanation for it, which will not be yours.
Does a local file need a new benchmarking study every year?
The financial data behind a comparable set is refreshed each year; a full new search is a separate question. What forces a fresh search is a change in the thing being tested, meaning the entity's functions, the risks it carries, the transaction itself or the market it operates in. Where nothing of that kind has changed, updating the comparables' results and re-testing against them is usually the proportionate course, provided the file records that the question was asked. What cannot be carried forward untouched is a range whose companies no longer resemble the entity.
Which transactions have to go into the local file?
The entity's controlled transactions, meaning its dealings with related parties rather than its third-party trade. That takes in the ones people forget because no invoice moves: interest-free balances, parent support undertakings, the use of a group intangible, staff seconded from another entity, cost allocations absorbed without a charge. Each needs identifying, quantifying and characterising before a method can be chosen for it. Transactions left out are the ones an auditor finds in the ledger, and their absence suggests the analysis was built around the documentation rather than around what the entity actually did.
Will having a local file stop a transfer-pricing audit?
No, and it is not meant to. What it changes is the shape of the audit. With a file, the auditor is testing an explanation the entity has already given, covering the method, the comparables and the functional analysis, and the discussion runs through documents. Without one, the entity is constructing its position while the questions arrive, and the auditor's own characterisation of the business becomes the starting point. The file also decides what can be argued later, because a position first stated during an enquiry is read differently from one stated at the time.
What is the CUP method?
Comparable uncontrolled price. You find the price charged in a comparable transaction between unrelated parties and test your intercompany price against it. It is the most direct of the methods and the most persuasive when it fits, because it compares like with like at the transaction level. Its limit is data: close comparables exist for commodities and standard products, rarely for bespoke services or unique intangibles, which is where the margin-based methods take over. See our transfer pricing work.
Do NRIs pay tax on money sent to India?
Sending your own funds to India is a transfer of capital, not income, so the remittance itself is not taxed. What is taxable is income the money then earns in India — interest, rent, capital gains — under the rules for the account type it sits in. Sending money out of India is the direction that needs certification before the bank will act. See NRE, NRO and FCNR accounts.
