Almost every Multinational Enterprises Group
(MNEG) must arrange for a wide scope of services to be provided and availed to
the entities in its organization. Examples of these are commercial,
administrative, financial, technical and legal services.
These services might also include management,
coordination and control functions applicable within the whole group.
The cost of providing such services may be
borne by the parent company; by a dedicated member entity such as a ‘group
services center’ or by any other member of the group.
When realizing about the need of service, an
independent company usually considers two options: (i) if the service needed
should be hired from an external source; or (ii) if it can be done in-house.
The same exercise should be made by a group
company in the way that the services can be performed in-house or received from
a fellow member group company.
In light of the above, it is more likely than
not that services like accounting and legal advice are hired from an external
party; when services like central auditing, financing advice or staff training
are performed internally.
In some cases, intragroup services arrangements
are linked to arrangements for the transfer of property of tangible or
intangible goods, or the license for the latters. Some other times, there are
cases where know-how is obtained resulting from a services agreement. This
cases are particularly complex when attempting to determine where the exact
border lies between the transferring and licensing of property, on the one
hand, and the transfer of a service on the other.
MAIN ISSUES
There two main issues in the transfer pricing
analysis for intragroup services:
(i)
Have intra group services been rendered?
Under the arm’s length principle, the answer to
the above question depends on whether the activity provides a respective group
member with economic or commercial value to enhance its commercial position.
This can be determined by considering whether
an independent enterprise in comparable circumstances would have been willing
to pay for the activity if performed for it by an independent enterprise or
would have performed itself in-house.
If the activity is not one for which the
independent enterprise would have been willing to pay or performed in-house,
then the activity would ordinarily should be considered as an intra-group
service under the arm’s length principle.
When a service is provided by a group member to
meet identified need of one or more specific fellow group members, it is
relatively straightforward to determine if an intragroup services has been
provided. Commonly yes, because it is something that an independent enterprise
would have hired from an independent party or would have provided for itself
in-house.
A more complex analysis is required when a
group member (usually the parent company or a regional holding company)
performs an activity solely based on its ownership interest in one or more
other group companies, i.e. in its capacity as shareholder.
This type of activity should give basis to
justify any charges to the recipient companies and it may be referred to “shareholder
activity” (which is different from the so called “stewardship activity” which
is a broader term that would also include the provision of services like the
ones provided by a coordination centre).
The following are examples of shareholder
activity that should give rise to any charge to the recipient enterprise:
-
Costs
of activities relating the juridical structure of the parent company itself,
such as meetings of the shareholders of the parent; issuance of shares in the
parent company and costs of the supervisory board;
-
Costs
relating to reporting requirements of the parent company including the
consolidation of reports; and
-
Costs
of raising funds for the acquisition of its participation in the recipient
company.
In contrast, if for example, a parent company
raises funds on behalf of other group member enterprise which uses these funds
to acquire a new company, then the parent company would be entitled to charge
as it will be considered to be providing a service (e.g. broker or funds
raiser).
Another type of these shareholder activity are
the costs of managerial and control (monitoring) activities related to the
management and protection of the investment such as participations.
Another
issue regarding intra group services that is worth to comment on is the concept
of “services on call”. This type of services require that the services provider
dedicates and keep available specific resources (e.g. employees, equipment, etc.)
in order to be on a standby mode so that
the potential recipient of the service can get the provision of said services on
a faster manner. An intra-group service would be deemed to exist if to the extent
that it would be reasonable to expect an independent enterprise in comparable
circumstances to incur in some “stand-by” charges to ensure the availability of
the services when the need for them materializes.
(ii)
How can the companies determine an arm’s length charge for said
services?
Once determined that there has been an
intragroup service rendered, it is necessary to verify that the consideration
or price charged for said services was set in accordance to the principle of
arm’s length.
This mean that the charge for the intragroup service
should have been that which would have been made an accepted by independent
enterprises in comparable circumstances.
To identify the amount (if any) that was
charged to the recipient of the service, the tax authority will need to identify
what arrangements (if any) have actually been put in place between the
associated enterprises to facilitate the charge made for the provision of the service
between them.
There are certain cases where the multinational
enterprises group uses the “direct charge method. This method is where the
associated enterprises are charged for specific services, in those cases where
the arrangements can be easily identified.
Direct charge method can certainly and clearly
be used where there are specific services provided by a group member whose core
business is providing these services to independent parties as well.
But direct charge method is not always feasible
to apply and MNEG have to incur in alternative methods when dealing with
services provided by a parent company or group member service centre.
In these cases, the practice of MNEG for
charging for intragroup services is often to make arrangements that are either
(i) readily identifiable but not based on a direct-charge method; or (ii) not
readily identifiable and either incorporated into the charge for other
transfers allocated amongst group members in same basis or, in some cases, not
allocated amongst group members at all.
When calculating the arm’s length consideration
the matter should be considered from both the perspective of the services provider
and the services recipient.
In this respect, relevant considerations
include the value of the service for the recipient and how much comparable
independent enterprise would be prepared to pay for that service in comparable
circumstances as well as the costs incurred by the services provider,
considering that a services provider will most likely provide the service for a
consideration higher than its cost, so that it can make a profit out of it.
The method to be used to determine the arm’s
length price should be one that has the support of the OECD thorough it
transfer pricing guidelines, such as the CUP (Comparable Uncontrolled Price) or
the Cost Plus Method.
It may be required the elaboration of a
functional analysis of then various members of the group in order to establish
the relationship between the relevant services and the relationship between the
relevant services and the member’s activities and performance.
In addition, it may be necessary to consider
not only the impact (immediate impact) of a service, but also its long-term
effect, bearing in mind that some costs will never actually produce benefits
that were reasonably expected when they were incurred into.
Determining the method will depend on if the
charge is such as it results in a profit for the service provider. As said
before, in an arm’s length deal, an independent provider would normally seek to
charge for services in a way as to generate profit rather than providing the
services merely at cost.
The economic alternatives available to the
recipient of the services also need to be considered.
In addition, sometimes the market value of intra-group
services is not greater than the costs incurred by the provider. This could
happen when the services are not within the ordinary scope of activities of the
provider, but they are still offered incidentally as a convenience for the MNEG.