Simplified Local File.
Robust, proportionate, defensible.

Essential structure of the Local File

1. Executive summary (2-3 pages)

An overview of the company, the intercompany transactions covered, the methods applied and the conclusion on adherence to the arm’s length principle.

2. Description of the company and group (5-15 pages)

Corporate structure, main activities, markets in which it operates, position in the group’s global value chain, main competitors.

3. Mapping of intercompany transactions (5-10 pages)

A list of all transactions with related parties abroad — type (import of goods, royalty, services, loan), counterparty, annual amount, contractual basis.

4. Functional analysis (FAR) per material transaction (15-25 pages)

For each material transaction (above a relevance threshold), an analysis of the functions performed, assets used and risks assumed by each party.

5. Choice of OECD method (10-15 pages)

Technical justification of the method applied (CUP, RPM, CPM, TNMM or PSM) for each transaction. Comparison with the alternative methods discarded.

6. Benchmark of comparables (10-15 pages)

Identification of 5-10 comparable companies in databases (Compustat, Orbis, RoyaltyStat). Filters applied, comparability adjustments, the resulting interquartile range.

7. Demonstration of adherence (3-5 pages)

Calculation of the tested company’s profit level indicator (PLI) vs the arm’s length range of the comparables. Conclusion: adherent, non-adherent, or adjustment required.

FAR analysis in practice

FAR (Functions, Assets, Risks) is the heart of Transfer Pricing. For each transaction:

Functions

What does each party do in the transaction? Examples: R&D, manufacturing, marketing, distribution, technical support, inventory management, quality control. The party that performs the most relevant functions should receive the greater remuneration.

Assets

Which assets does each party use? Tangible (machinery, plants) and intangible (brand, patent, know-how). Unique intangibles (a registered trademark, an exclusive patent) carry greater added value.

Risks

Which risks does each party assume? Market risk (demand variation), inventory risk (obsolescence), credit risk (a customer not paying), currency risk (exchange-rate variation), regulatory risk, etc. The party that assumes more risks should receive the greater remuneration.

Result of the FAR analysis: the functional classification of the Brazilian entity (low-risk distributor, contract manufacturer, low-value-added service provider, etc.) — this classification determines the appropriate OECD method.

Selecting comparables

Comparables are transactions between independent parties in similar circumstances. They can be:

• Internal: the company itself carrying out similar transactions with third parties
• External: other independent companies in the market

For mid-market companies, external comparables via a database are the standard. Tools: Compustat (American), Orbis (Bureau van Dijk), RoyaltyStat (royalties), Mergermarket (M&A for PSM).

Typical comparability filters

1. Sector (NAICS or SIC)
2. Economic function (distributor, manufacturer, etc.)
3. Size (similar revenue)
4. Independence (not part of a multinational group)
5. Positive profit (eliminating companies in chronic loss)
6. Data availability (3-5 years)

Result: a list of 5-10 comparables. Comparability adjustments applied (working capital, production capacity, etc.) and calculation of the arm’s length interquartile range.

Filing and deadline

The Local File is filed together with the ECF (Tax Accounting Bookkeeping), on the last business day of July of the calendar year following the base year.

A realistic production timeline:

• Data collection and understanding of the transactions: 2-3 weeks
• FAR analysis and choice of method: 2-3 weeks
• Benchmark of comparables: 2-3 weeks
• Technical drafting and revisions: 2-3 weeks

Total: 8-12 weeks for a mid-market company. Start the project in January/February for a July filing with time for validation.