Avoiding Non-Compliance in Transfer Pricing Local File

In today’s increasingly complex tax landscape, multinational and local enterprises alike are under heightened scrutiny from tax authorities. At the center of this scrutiny lies the Transfer Pricing Local File, a critical component of documentation that substantiates the arm’s length nature of related-party transactions.

While the importance of the Local File is widely acknowledged, its preparation is often underestimated. Many taxpayers fall into avoidable traps that compromise the integrity of their transfer pricing position and expose them to risk.

This article highlights some of the most common mistakes observed in practice—and offers guidance on how to avoid them.

Superficial or Generic Functional Analysis (FAR)

A robust Local File must contain a clear and detailed functional analysis that accurately reflects the roles, assets, and risks of the local entity in each transaction. However, many files rely on generic templates or group-wide descriptions that fail to capture the specific economic substance of the local business. try to Customize the FAR to reflect the actual activities performed by the local entity. Ensure it is aligned with financial results and operational reality.

Use of Outdated or Non-Comparable Benchmarking Studies

Benchmarking is central to determining arm’s length ranges. However, it is common to encounter studies that rely on outdated data, overly broad comparables, or benchmarks prepared without consideration of the local entity’s risk profile, industry, or geographic context. Benchmarking analyses should be refreshed annually, applying clear and objective comparability criteria while ensuring regional relevance and data integrity.

Missing or Inconsistent Intercompany Agreements

Tax authorities increasingly expect formal, written intercompany agreements that accurately reflect the actual conduct of the parties involved. Missing, outdated, or boilerplate contracts can undermine the credibility of the transfer pricing documentation. It is essential to include signed and up-to-date agreements for all material transactions and to ensure consistency between the contractual terms, actual conduct, and financial outcomes

Unclear or Poorly Described Transactions

The Local File should clearly articulate the nature, value, and purpose of each intercompany transaction. Vague or overly technical language that lacks commercial context reduces transparency. Each transaction should be described in clear, business-oriented language, including details such as volume, frequency, and the underlying business rationale to support its necessity and pricing.

Lack of Reconciliation with Financial Records

One of the most critical red flags in transfer pricing documentation is a discrepancy between the figures reported in the Local File and those in the audited financial statements or general ledger. Such inconsistencies can raise immediate concerns for auditors and tax authorities. To mitigate this risk, it is essential to ensure full reconciliation between the Local File, the general ledger, and the corporate tax return, while transparently documenting any adjustments or allocation methodologies used.

Failure to Address Local Regulatory Requirements

While OECD guidelines form the foundation of transfer pricing documentation, they must be adapted to comply with local regulatory requirements—such as Egypt’s Law 91/2005, Law 206/2020, and Instruction No. 78 of 2023. Overreliance on standardized global templates often results in non-compliance with jurisdiction-specific expectations. To ensure full alignment, the Local File should be carefully tailored to meet local requirements regarding language, format, submission procedures, and mandatory disclosure forms.

Inadequate Explanation for Losses or Deviations

When the tested party reports sustained losses or profitability below the arm’s length range, a common shortfall in documentation is the lack of a clear and compelling justification. Without concrete, context-specific evidence, such outcomes are likely to attract scrutiny from tax authorities. To mitigate this risk, it is essential to clearly document the commercial and economic reasons for such results—such as market entry challenges, startup-phase costs, or extraordinary events like the COVID-19 pandemic—and, where possible, support the explanation with third-party data or external benchmarks.

Discrepancies Between the Local File and Tax Return Disclosures

A mismatch between the Local File and statutory disclosure forms—such as Egypt’s Form 38 or Annex 4—can create significant audit risk. Any misalignment may signal data inconsistencies or raise concerns about the transparency of intercompany transactions. To avoid such issues, it is crucial to ensure full coordination between the tax, finance, and legal departments, maintaining consistency across all transfer pricing documentation and disclosures

Conclusion

Transfer pricing documentation is not merely a compliance obligation—it is a strategic safeguard. A well-prepared Local File reflects transparency, control, and alignment with both local regulations and international standards. More importantly, it strengthens a company’s ability to withstand tax authority scrutiny and defend its transfer pricing policies. Avoiding common pitfalls is not just about mitigating penalties; it’s about building a more robust, compliant, and resilient tax function.

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