BEPS Action 13: The Three-Tiered Reporting Framework

The BEPS Action 13 three-tiered reporting framework requires large multinational groups to prepare three connected transfer pricing documents: a Master File describing the group as a whole, a Local File documenting each entity’s intercompany transactions in a given country, and a Country-by-Country Report (CbCR) that discloses revenue, profit, taxes paid, and employees for every jurisdiction where the group operates. The framework was developed under the OECD/G20 Base Erosion and Profit Shifting project to target structures that shift profits away from the countries where real economic activity takes place, and roughly 120 jurisdictions have now written CbCR rules into law.¹²

Each tier answers a different question. The Master File tells a tax authority what kind of business it is looking at globally. The Local File shows whether a specific entity’s intercompany pricing holds up under scrutiny. The CbC report lets examiners in every jurisdiction compare where profits land against where people, capital, and activity actually sit. Together, the three documents make it much harder for a group to tell one story to one country and a different story to another.

Tier One: The Master File

The Master File is the group-level document. Every jurisdiction where the group operates receives the same version, which is the point: no single tax authority gets a tailored account.

It must include an organizational chart showing the legal ownership structure and geographic location of every operating entity, plus a written description of the group’s business covering its main profit drivers and the supply chain for its five largest product or service lines by turnover, and any other lines exceeding 5% of group revenue.³

Intangibles get their own dedicated treatment. The Master File must list the group’s important intangible assets, identify which entities legally own them, describe the group’s overall strategy for developing and exploiting those assets, and disclose any significant transfers of intangible interests between related entities during the fiscal year.³ That focus reflects how often intellectual property sits at the center of transfer pricing disputes.

The document rounds out with the group’s intercompany financial arrangements and tax position: how the group is financed, which entity performs any central treasury function, and what advance pricing agreements or tax rulings affect the allocation of income between jurisdictions.³

Tier Two: The Local File

The Local File shifts from global context to granular detail. It documents one entity in one country and describes local management structure, business strategy, and the competitive environment the entity faces in its domestic market. The bulk of the document, though, is transactional analysis.

Every intercompany transaction involving the local entity must be documented: payments for goods, services, licensing fees, cost-sharing contributions, and financing. For each one, the entity must select and apply a recognized transfer pricing method under the OECD Transfer Pricing Guidelines to demonstrate that the related-party price matches what independent parties would have agreed to.⁴ Benchmarking studies comparing the entity’s results against those of comparable independent companies typically support the chosen method.

The Local File closes with the entity’s financial statements and a reconciliation tying the transfer pricing analysis back to the figures on the local tax return. That reconciliation lets an auditor follow a specific intercompany charge from the entity’s books to its arm’s-length justification without guesswork.

Tier Three: The Country-by-Country Report

The CbC report uses a standardized template to disclose financial data for every jurisdiction where the group operates. Revenue is broken into two columns: revenue from related-party transactions and revenue from unrelated-party transactions.⁵ That split alone shows how much of the income in a given jurisdiction comes from internal trading versus genuine third-party sales.

Each jurisdiction entry must also report profit or loss before income tax, income tax paid on a cash basis, and income tax accrued for the current year. When cash tax paid and tax accrued diverge significantly, that gap tends to draw auditor attention. The report also tracks full-time equivalent employees, stated capital, and accumulated earnings in each jurisdiction, giving a rough measure of the economic substance behind the profits reported there.⁵

Every constituent entity in the group must be identified by name, jurisdiction, and primary business activity, with the template offering standardized activity codes covering categories such as manufacturing, research and development, holding intellectual property, internal group finance, and regulated financial services.

Who Has to File Each Tier

The CbC report is the only tier with a single, globally coordinated threshold. It applies to multinational groups with consolidated revenue of at least €750 million in the preceding fiscal year. That threshold was set high on purpose, keeping mid-sized groups out of the most burdensome reporting while concentrating oversight on the largest global players. The same €750 million figure also defines the scope of the Pillar Two global minimum tax rules, which simplifies administration for taxpayers and governments alike.¹

Master File and Local File thresholds work differently. Many jurisdictions set their own, often much lower, revenue triggers for these documents. A group well below the €750 million CbCR line may still need to prepare and maintain detailed Master File and Local File documentation in every country where it has intercompany transactions. And even groups exempt from all formal documentation requirements are not fully off the hook: general tax law in most jurisdictions still requires businesses to justify their intercompany pricing when challenged.

How the United States Implements the CbC Report

In the United States, the CbC reporting obligation runs through IRS Form 8975 and its accompanying Schedule A. A U.S. person that is the ultimate parent entity of a multinational group must file Form 8975 if the group had annual revenue of $850 million or more in the immediately preceding reporting period.⁶ The $850 million figure is the U.S. dollar equivalent the IRS uses in place of the OECD’s €750 million standard.

Form 8975 must be attached to the entity’s annual federal income tax return and filed by the return’s due date, including extensions. It cannot be submitted separately. For each constituent entity, Schedule A requires the legal name, tax identification number, jurisdiction of organization, entity role (ultimate parent, reporting entity, or both), and a coded business activity classification.⁶

One boundary worth flagging. The IRS definition of “constituent entity” for Form 8975 purposes excludes certain foreign corporations and partnerships for which information is not otherwise required under IRC Section 6038. Groups filing both in the United States and elsewhere should not assume the entity lists in a U.S. Form 8975 and a foreign CbC report will match exactly.

Filing, Exchange, and Secondary Filing

CbC reports are filed electronically using a standardized XML schema so that data arriving from different countries can be processed through a common system.⁷ Most jurisdictions require the report within 12 months after the close of the reporting fiscal year, and the report is filed with the tax authority in the jurisdiction where the ultimate parent entity is resident.

From there, the data flows through automatic exchange agreements. Many jurisdictions participate through the Multilateral Competent Authority Agreement on the Exchange of CbC Reports, which lets the parent country’s tax authority share the report with every jurisdiction where the group has constituent entities, without requiring separate filings in each one. The United States uses a different legal mechanism, bilateral competent authority arrangements based on existing tax treaties and information exchange agreements, with active bilateral CbCR exchange arrangements in place with more than 50 jurisdictions.⁸

The exchange system has gaps, and Action 13 anticipates them. When the ultimate parent entity’s home jurisdiction either does not require CbCR, lacks an exchange agreement with a particular country, or experiences a systemic failure in its exchange mechanism, a secondary filing obligation shifts to constituent entities in the affected jurisdictions. Groups can avoid duplicative local filings by designating a surrogate parent entity, which files the CbC report in its own jurisdiction of residence, provided that jurisdiction requires CbCR and has qualifying exchange agreements with the relevant countries.⁹

Penalties for U.S. Filers

U.S. penalties for getting transfer pricing wrong split into two categories: penalties for mispricing and penalties for failing to report.

On the mispricing side, IRC Section 6662 imposes an accuracy-related penalty of 20% of the underpayment when a transfer pricing adjustment results in a substantial valuation misstatement. The rate doubles to 40% for a gross valuation misstatement, which applies when the transfer price claimed is off by a factor of four or more, or when net Section 482 adjustments exceed $20 million.¹⁰

Contemporaneous documentation is the primary defense. It must exist when the tax return is filed and must be produced within 30 days of an IRS request during an examination. Having a binder on the shelf is not enough. The IRS evaluates whether the documentation is adequate and reasonable, which means it must show that the taxpayer selected the most reliable method under the best method rule and applied it using accurate data.¹¹ Most penalty disputes turn on the quality of the documentation rather than its existence.

On the reporting side, failure to file Form 8975 triggers penalties under IRC Section 6038: $10,000 for each annual accounting period where the failure occurs, plus an additional $10,000 for every 30-day period the failure continues after the IRS mails a notice, capped at $50,000 in additional penalties per period.¹²

Why CbC Data Now Carries More Weight

Under the Pillar Two global minimum tax, jurisdictions can impose a top-up tax when a multinational group’s effective tax rate in a country falls below 15%. The OECD created a transitional CbCR safe harbour that lets groups use their existing CbC report figures to demonstrate compliance in qualifying jurisdictions, rather than performing a full GloBE calculation from day one.¹³

The transitional safe harbour was originally set to expire for fiscal years beginning after 2025, and in January 2026 the OECD Inclusive Framework extended it by one year as part of its “Side-by-Side” package.¹⁴ The practical consequence for groups preparing CbC reports is that errors can now cost safe harbour eligibility and trigger a full GloBE calculation for the affected jurisdiction. The three tiers of Action 13 were designed as a transparency framework in 2015; the CbC report has since become load-bearing infrastructure for the global minimum tax as well.

1
OECD. Country-by-Country Reporting for Tax Purposes
2
OECD. Base Erosion and Profit Shifting (BEPS)
3
OECD. Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report
4
OECD. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022
5
South African Revenue Service. External BRS on the OECD CbC Reporting
6
Internal Revenue Service. Instructions for Form 8975 and Schedule A (Form 8975)
7
Internal Revenue Service. Country-by-Country Reporting Guidance
8
Internal Revenue Service. Country-by-Country Reporting Jurisdiction Status Table
9
OECD. Action 13 Country-by-Country Reporting Implementation Package
10
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
11
Internal Revenue Service. Transfer Pricing Documentation Best Practices Frequently Asked Questions (FAQs)
12
GovInfo. 26 U.S. Code 6038 – Information Reporting With Respect to Certain Foreign Corporations and Partnerships
13
OECD. Safe Harbours and Penalty Relief – Global Anti-Base Erosion Rules (Pillar Two)
14
OECD. Global Anti-Base Erosion Model Rules (Pillar Two)