OECD to update approach to intra-group services: Transfer Pricing implications
The OECD has published proposed revisions to Chapter VII of the OECD Transfer Pricing Guidelines, which addresses intra-group services. While the document is still a draft for discussion, the proposal may have a significant impact on documentation and compliance obligations relating to management, administrative, technical, marketing, IT or financial services.
The arm’s length principle remains unchanged. However, the OECD places greater emphasis on robust economic analysis and high-quality supporting documentation.
Major changes
Benefit test
The benefit does not need to ultimately materialise. But when purchasing the services, the recipient should be able to reasonably expect to benefit from them. Taxpayers should therefore be prepared to demonstrate the underlying business rationale for incurring the relevant costs.
Shareholder activities
Subsidiaries should not bear the cost of activities carried out solely in the interests of shareholders. However, parent’s activities may constitute chargeable services where they provide a genuine benefit to other group entities.
Cost allocation
OECD prefers the direct-charge approach where it is practicable without creating excessive burdens. Allocation keys should reflect the nature of the services and the expected benefits, while being reasonable, verifiable and applied consistently.
Choice of TP method
The cost plus method should not be applied by default. The choice among the CUP, cost plus, TNMM or profit split methods should reflect the economic nature of the transaction, including whether it involves intangibles.
Pass-through costs
Recharging costs without a markup can be appropriate where the charging entity acts solely as an intermediary. If it engages resources, incurs risks or adds value, a markup may be justified which should generally reflect the actual contribution made.
How to prepare?
MNE groups should consider taking the following steps:
- Reassess the benefit test and verify evidence of services performed.
- Distinguish between shareholder activities and services provided to subsidiaries,
- Review allocation keys and cost bases.
- Check if the applied TP methods and markups are appropriate,
- Review pass-through costs.
- Revise TP documentation and agreements.
Our comments
The proposal is not revolutionary, but it does limit room for mechanical approaches, such as routine application of cost plus method. Taxpayers will need to be better prepared to demonstrate who received the benefit, why the costs were incurred, how they were allocated, or whether the selected method was appropriate for the nature of the services.
Now is a good time to review your service arrangements before the revised guidance is finalised and any inspections ensue. Feel free to contact us.
This blog post is provided for general information purposes to keep you up-to-date with changes in tax law, tax rulings by authorities, case law of courts and interesting commentaries. Doradztwo Podatkowe WTS&SAJA shall not be held legally liable for any acts or omissions resulting from reliance on such information.