Transfer Pricing on Intra-group Services

1.    Introduction

Services provided by one or more members of a Multinational Enterprise (“MNE”) for the benefit of one or more members of the same MNE are commonly referred to as intra-group services. Intra-group services are related party transactions and must adhere to the Arm’s Length Principle (“ALP”).

Outlined below are the key considerations for intra-group services from a Transfer Pricing (“TP”) perspective.

2.    Types of Intra Group Services (“IGS”)

•        i.          Core or value-adding services
•      ii.          Non-core or low value adding services.

3.    Two-step principle to determine the ALP

i.                Step 1 - Determining whether IGS are rendered

• Perform the “Benefit test” – Demonstrate the economic value of the services received and their willingness to pay a third party.

ii.              Step 2 - Determining the ALP

• Direct charge method - Services are similar to those provided to an unrelated party.
• Indirect charge method - Use cost allocation and apportionment methods.

4.    Non chargeable IGS

• Shareholder activity - Services performed solely due to ownership interest not being treated as IGS.
• Incidental services - Service performed for some group member, but incidentally benefits other group members.
• Duplicate services - Services are performed by themself or through a third party.

5.    Key relevant factors for TP

                 i.          Denial of deduction for expenses.

               ii.          Questions on commercial expediency of IGS.

             iii.          Selection of the most appropriate TP method.

             iv.          Demonstrating receipt of IGS with tangible evidence.

               v.          Demonstrating economic and commercial benefits derived from IGS.

             vi.          Lack of market comparables.