Transfer pricing of intra-group services: a toolkit for the analysis
Borys Ulanenko
Cross-border intra-group services transactions are especially
challenging to assess. Unlike tangible goods, services are not observable at a
country’s borders. For tax administrations, it may be challenging to measure
and evaluate these transactions, and they often see intra-group services as tax
avoidance instruments. Therefore, specific guidance is needed to assess intra-group
services from a transfer pricing perspective. That is why both the OECD
Guidelines and the UN Manual dedicate separate chapters for the discussion
about intra-group services.
Below, we
are summarizing key elements of transfer pricing analysis of intra-group services.
You can remember and use a decision tree during the ADIT exam, as well as in
your work.
1. Does the service pass the benefit test?
In transactions between independent parties, it is reasonable to expect that if someone is paying for the service, he or she will actually receive that service. It is in recipient’s interest to ensure that the service was provided and that it was needed. In transactions between related parties, however, this may not always be the case. Therefore, the benefit test is needed to demonstrate that the service transaction was conducted.
1) Demonstration that the recipient
received the service, and
2) Demonstration that the recipient
needed the service
The OECD
Guidelines specifically mention several cases where benefit test will not be passed,
including shareholder activities, duplicate services and incidental benefits
(including passive association).
2. Does the service qualify as low value-adding?
Low value-adding services are services that do not add substantial value to the core business of a group. Building on country practices, OECD introduced a simplified approach to low value-adding services as part of BEPS Actions 8-10. The simplified approach gives several benefits to taxpayers, and it is best to understand if services qualify as low value-adding in the early stages of the analysis (as it may make the next steps easier).
3. Can an individual beneficiary be identified (with reasonable efforts)?
In
practice, two charging methods are used for intra-group services: the direct
charge method and the indirect charge method (don’t confuse with transfer
pricing methods!).
4. Can the exact cost of the service be practically determined? (“direct charging method”)
When a particular beneficiary of the service can be identified, it is best to use the direct charge method. This method directly links the benefit and the cost. Accordingly, the demonstration of benefits is usually straightforward for both the taxpayer and tax administration. In practice, it is often the case that even though the beneficiary can be identified, it is difficult to determine an actual cost of the service. In such cases, MNEs often use tariffs and FTE costs for actual charging (which is a mix of direct and indirect charging).
5. Determine an allocation key (“indirect charging method”)
When it is difficult or impossible to identify the exact beneficiary of the service, the indirect charging method is used. Indirect charging involves the following steps:
1) Identification of the cost pool to be allocated
2) Identification of a group of beneficiaries
3) Determination of allocation keys
4) Allocation of costs to the beneficiaries using allocation keys
