How can we ensure that intra-group service arrangements conform to the arm’s length principle?
Intra-group services refer to services offered by a member of a multinational (MNE) group to other group members, regardless of whether they are situated in the same or different tax jurisdictions.
Essentially, any service that an independent company would be willing to pay for or perform on its own but instead outsources to its affiliated companies within the group can be considered an intra-group service. However, under the arm’s length principle, services provided by a group member to another group member are chargeable only if there is a demonstrable benefit being derived by the service recipient. To be chargeable, the intra-group services only need to have an expectation of benefit – the fact that the activities may not bring any actual benefit does not mean that the provided services shall not be chargeable.
How can we ensure that intra-group service arrangements conform to the arm’s length principle?
When determining whether intra-group services were provided under terms that conform to the arm’s length principle, the international standards embedded in both the OECD Guidelines and the UN TP Manual require two conditions to be met:
- Firstly, it is necessary to establish whether chargeable services have been provided. In some instances, this is straightforward, such as when specific services were requested by one or more group entities and were subsequently provided by other group entities.
- Secondly, if chargeable intra-group services have been provided, methods for determining an arm's length consideration for these services must be applied. This involves charging the service recipient based on the method applied by the service provider.
Under the OECD Guidelines and the UN TP Manual, an activity will not result in any chargeable service if it is considered to be a shareholder activity, or if it provides benefit only through passive association or provides only incidental benefit. Likewise, duplicative activities that do not benefit the recipient are not chargeable services.
The recommended and commonly used methods for analysing intra-group service arrangements are the Comparable Uncontrolled Price (CUP) method or the cost-based method (such as the cost-plus method or Transactional Net Margin Method, TNMM). The CUP method may be chosen where a comparable service is provided by independent parties in the recipient’s market, or when the group service provider also provides similar services to unrelated parties under comparable circumstances.
Concluding Remarks
In the absence of potential CUPs, cost-based methods that analyse the gross or net margins of comparable independent transactions may be applied, assuming the nature of the activities involved, assets used, and risks assumed by the related parties are comparable to those undertaken by independent parties.If there are difficulties to apply such transfer pricing methods, a combination of methods may be used to determine the arm’s length pricing.
