7. Special Considerations for Specific Cases
7.2. Intra-group services
7.2.3. Determining the arm’s length charge for intra-group services
test is passed and Company Y can charge the associated cost as per the arm’s length standard.
7.2.3. Determining the arm’s length charge for intra-group services
which often necessitate some degree of estimation or approximation as a basis for calculating an arm’s length adjustment. Where cost allocation and apportionment methods are used, these are considered indirect charge methods.
When using the indirect method, the Taxable Person needs to take into account the commercial features of the individual case (for example, whether the allocation key is reasonable under the circumstances). Further, the approach should contain safeguards against manipulation, follow sound accounting principles, and be capable of producing charges or allocations of costs that are linked to the actual or reasonably expected benefits to the recipient of the service.
The indirect charge method is generally not appropriate for specific services that form a main Business Activity of the enterprise or services that are provided not only to Related Parties or Connected Persons but also to independent parties.
7.2.3.4. Determination of the cost base
Where a cost-based method is determined to be the most appropriate method to the circumstances of the case, the relevant cost base should be determined. A summary of the approach for determining the cost base for centralised services is as follows:
1. The initial step is to calculate, on an annual basis, a pool of all costs incurred by all members of the Group in performing each category of the centralised intra-group services. The costs to be pooled are the direct and indirect costs of rendering the service as well as an appropriate level of operating expenses determined using an acceptable allocation key where relevant.
2. Secondly, the cost pool should exclude costs that are attributable to an in-house activity that benefits solely the company performing the activity (including shareholder activities performed by the shareholding company).
3. Thirdly, the MNE Group should identify and remove from the pooled costs any costs that are attributable to services performed by one Group member solely on behalf of one other Group member (as this would be charged directly to the specific beneficiary).
4. Lastly, the MNE Group needs to allocate the remaining pool of costs that is attributable to the services which are provided to multiple members of the MNE Group among benefitting members of the MNE Group. More than one allocation key can be applied for this purpose based on the nature of the service and the fact that the allocation key should reasonably be linked to the expected benefit, for example, the allocation key for services related to people might employ the share of total headcount and information technology services might employ the share of total users. The same allocation key or keys must be used on a consistent basis for all allocations of costs relating to the same category of services.
7.2.3.5. Profit mark-up
In determining the arm’s length charge, the service provider should apply a mark-up to all costs that are not pass-through in nature.28 The mark-up should be determined using comparable data. However, to reduce the compliance burden on Taxable Persons, this Guide adopt the simplified approach provided under Chapter VII of the OECD Transfer Pricing Guidelines, whereby certain low value-adding intra-group services may be charged out at a cost-plus 5% mark-up without the need for a detailed benchmarking analysis. In general, low value-adding intra-group services should meet the following criteria:
• the services are of a supportive nature;
• they are not part of the core business of the MNE Group (i.e. not creating the profit- earning activities or contributing to economically significant activities of the MNE Group);
• they do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles; and
• the services do not involve the assumption or control of substantial or significant risk by the service provider and do not give rise to the creation of significant risk for the service provider.
• accordingly, the following activities would not qualify for the safe harbour outlined in this section:
o services constituting the core business of the MNE Group;
o research and development services;
o manufacturing and production services;
o purchasing activities relating to raw materials or other materials that are used in the manufacturing or production process;
o sales, marketing and distribution activities;
o financial transactions;
o extraction, exploration, or processing of natural resources;
o insurance and reinsurance; and
o services of corporate senior management.
Below is an illustrative example of services that may be considered low value adding and thus qualify for the safe harbour.
Example 21: Analysis of low value adding intragroup services
ABC Group operates in the chemicals industry. It provides technical services to third party customers.
28 Pass-through costs are expenses that are incurred on behalf of service recipients. The exact amount
The Group has its regional headquarters based in the UAE. The regional headquarters employs teams that support the Group entities operating in the region.
The two services provided by the regional headquarters are as follows:
• Technical services: This service includes guidance on testing and inspection techniques to be applied when servicing the third-party customers.
• Support services: This includes keeping books and records, processing invoices, recruitment and onboarding and IT.
In establishing its Transfer Pricing policy, the regional headquarters assessed whether the above services would qualify as low value adding intragroup services as follows:
Service Conclusion Transfer Pricing Policy
Technical services
This service is related to the core business activities of the entities and contributes economic value to the Group. Accordingly, it is not considered low value adding in nature and the safe harbour cannot be used as a Transfer Pricing policy.
A detailed comparability analysis showed that an appropriate arm’s length mark-up on cost to be applied for similar services would fall in the range of 8% -12%.
Support services
This service is supportive in nature and does not result in direct revenue generation. Accordingly, the service can be considered low value in nature and the safe harbour may be applied.
5% mark-up on cost (in line with the safe harbour)
The initial step in applying a simplified approach to low value adding services is to categorise, calculate and pool all costs associated with the low value adding services.
These costs should then be allocated amongst group members based on appropriate allocation keys. The appropriate allocation key will depend on the nature of the service.
For example, IT services may be allocated on number of users or employee related costs may be allocated based on headcount. The pragmatic intent of using a safe harbour means a balance needs to be struck between theoretical sophistication and practical administration. The final step is to apply a profit mark-up, in the case of the low value adding services safe harbour the mark up shall be 5%.
Taxpayers should maintain sufficient documentation to support their conclusions that services included in the simplified approach are in fact low value adding in nature.