handbook-tb

Diane Ringunder review. To assist in the balance of burden and need, taxpayersshould be permitted to store the documentation in a manner theydeem appropriate (electronic, paper, and so forth) as long as it can beproduced in a useable form to the tax authorities.Documentation updates: Both the master file and the local fileshould be updated annually, although in many cases information (forexample, functional analysis or description of business) may not change.The Discussion Draft offers a recommendation — on which it specificallyseeks comments — to the effect that where operating conditionsare unchanged, the tax administration may permit taxpayers to updatetheir database searches for comparables in the local file every three years.However, financial data for the comparables would be updated annually.Language: The expectation is that the master file would be preparedand submitted to jurisdictions in English. However, at a minimum,the local file should be prepared in the relevant local language.To the extent the tax authorities need a translation of portions of themaster file, they can make that request to taxpayers and provide adequatetime to secure the translation.Penalties: The draft cautions against the imposition ofdocumentation-related penalties (civil or criminal) where taxpayershave made a reasonable, good faith effort and/or do not have access tothe information. But it is not a good defence to contend that some otherrelated party bears the group responsibility for documentation. Thedecision not to impose these penalties would not prevent a jurisdictionfrom making the underlying transfer pricing adjustment in order tobring taxpayers into compliance with the arm’s length principle. Twostrategic observations regarding documentation-related penalties mayguide the thinking of a country about designing a penalty regime:(a) Differences in penalty regimes among countries may influencewhether a taxpayer “favours” one jurisdiction overanother in pricing. For example, if one jurisdiction imposesstronger penalties (compliance and/or underlying substantivepricing penalties) than another, the taxpayer may bemore inclined to shift resources (and even transfer pricingprofits) to the jurisdiction with the stronger penalty regimeso as to avoid the imposition of large penalties;518