Almost all groups are engaged in intercompany services to some extent. This could for example include administrative, commercial, financial, technical or head office services. In practice we often see that these intercompany services are insufficiently substantiated. Partly because of this, tax authorities typically consider these services as an easy route to make corrections. In this blog, we will provide you with the key considerations for intercompany services from a transfer pricing perspective based on the OECD Guidelines and the Dutch TP decree.
There are two main issues in the transfer pricing analysis for intercompany services: (i) determining whether an intercompany service has actually been performed and (ii) what the arm’s length charge of the respective intercompany service should be. Both issues will be further explained below.
Determining whether an intercompany service has actually been performed
When analysing intercompany services, it is necessary to determine whether the activities performed by a group member create a commercial and economic value to the recipient, i.e., what the actual benefit is. Even when the simplified method for low value-adding services is applied, a (simplified) benefit test is a required element of your TP documentation.
Furthermore, costs associated with shareholder activities should be (and remain) at the level of the shareholder and therefore not charged to the group. Some of these costs could be considered as mixed costs and special considerations with respect to the charging methodology should be taken into account. Treatment or deductibility of these shareholder costs depends on the country in which the shareholder is situated.
Taxpayers should ask themselves the question: “Would an independent third party be willing to pay for this service”? If the answer to this question is yes, a charge is appropriate (and vice versa). Duplications may occur following a takeover and therefore special considerations with respect to the charging methodology should be taken into account in case of mergers and acquisitions.
Determining the arm’s length charge of the intercompany service
If after step 1 it is concluded that the activities performed qualify as intercompany services, the appropriate method of charging the recipient of the service must be determined.
All direct and indirect costs related to the intercompany service should be included in the cost base. The cost base should then be allocated to the respective service recipient. A direct charge method is preferred but if this cannot be applied, an indirect charge method with appropriate allocation keys can be applied. It is important that the allocation key selected reasonably reflects the benefits likely to be derived by the service recipient, while balancing theoretical sophistication and practical administration.
In most cases, a cost-based transactional net margin method could be considered an appropriate TP method to determine the intercompany price for services. However, the use of the comparable uncontrolled price (CUP) method should also be considered.. It should be noted that in general, an independent enterprise would seek to charge for services in a way that generates profit, rather than providing services merely at cost. The profit mark-up rate should be determined by a benchmark study per category of services, or the simplified method could be applied if the activities qualify as low-value-adding services (i.e., application of a mark-up of 5% without a benchmark study). Costs considered disbursement costs could be charged out without a profit mark-up.
Should you need assistance in setting up your transfer pricing for intercompany services, please make an appointment for a free consultation by phone or fill in our contact form. We are looking forward to meeting you.
- More specifically, Chapter VII – Special Considerations for Intra-Group Services of the 2022 OECD Transfer Pricing Guidelines.
- Dutch TP Decree 2022 (Verrekenprijzenbesluit 2022), Section 6.