Revisions to Chapter VII of the OECD Transfer Pricing Guidelines

Submitted by: Crowe Legal y Tributario B&M, S.L.P. (Crowe Spain), on behalf of Crowe Legal y Tributario B&M, S.L.P. (Crowe Spain), Crowe Valente (Crowe Italy), Crowe Poland, RWT Crowe GmbH (Crowe Germany), Möhrle Happ Luther Partnerschaft Mbb (Crowe Germany) and Vandelanotte (Crowe Belgium). 

INTRODUCTION

We welcome the opportunity to contribute to this consultation. Crowe is an international network of professional services with extensive experience in transfer pricing across Europe, Americas and other jurisdictions, particularly in sectors such as pharmaceuticals, manufacturing, distribution and renewable energy. Our comments below follow the structure of the questions set out in the discussion.

BOX 1 – SHAREHOLDERS’ ACTIVITIES

Question 1. The understanding and practical application of existing guidance in paragraph 7.10 of the OECD 2022 Transfer Pricing Guidelines.

Paragraph 7.10 of the OECD 2022 Transfer Pricing Guidelines provides the cardinal framework for identifying shareholder activities and distinguishing them from chargeable intra-group services. The examples included in the provision are generally well understood in practice and continue to reflect situations where activities are undertaken solely because of a parent company’s ownership interest in its subsidiaries. In particular, activities relating to shareholder meetings, stock exchange listings, consolidated financial reporting, investor relations, parent-company tax compliance and corporate governance are commonly recognised as shareholder activities that should not be charged to other group entities.

The notion of shareholder activities rests on the supposition that activities of the shareholder for its own sake could be disentangled from the activities of the shareholder for the operational benefit of the company. This premise might be valid for the shareholding of free-floating shares. It is, however, very controversial at the level of, for example, small and medium enterprises (SMEs) companies, as well as family-owned companies. In Germany, for example, SMEs and family-owned companies make the majority of enterprises. For SMEs and family-owned companies, the shareholder often plays a vital role in the operational management of the group, even though, in some instances, without holding an official employer position or holding a clear executive title. It is this aspect that is connected to the roots of regular disputes with tax authorities about the application of the notion of shareholder activities and the most major flaw in the definition of shareholder activities. This is one of the limitations of the examples provided. For example, SMEs and family-owned companies regularly use shareholder meetings, or consolidated reporting in order to evaluate the operational performance of the group, which at the same breath also use to breakdown these observations and understandings into operational conclusions for the individual subsidiaries within the MNE, which should then be deemed as a service to the subsidiaries. For SMEs and family-owned companies, the occurrence of a truly undertaken shareholder activity, which has no operational benefit for the group and the subsidiaries, is rather the exception.

Furthermore, the notion of shareholder rallies on discrete view of activities, in which each separate activity is identifiable and quantifiably separable from other activities. While this notion is probably far from being right for most situation in connection to shareholder activities, it is definitely incorrect for SMEs and family-based companies, since the operational activities of shareholder and possible true shareholder activities, if there are any, are performed simultaneously and continuously. A proper delineation is neither practical nor possible without putting an excessive burden on taxpayers.

We would recommend and welcome stressing in the documentation, that, the provision of shareholder activities is under some circumstances, for example in the case of family-owned multinational companies, limited to some individual activities and that in those cases MNEs demonstrate non or redundant amount of shareholder activities.

Further to the conceptual unclarity of the guidance regarding cases of no or redundant amount of shareholding activities, additional practical difficulties frequently arise in its application. In many multinational groups, activities performed by parent companies, regional headquarters or senior management functions cannot readily be characterised as exclusively shareholder-related or exclusively operational in nature. Modern multinational groups increasingly rely on centralised management structures under which strategic decision-making, governance, oversight and operational support functions are closely integrated.

As a result, many activities contain both shareholder and service elements. In our experience, one of the principal practical challenges does not concern the identification of the examples expressly listed in paragraph 7.10, which are generally well understood. Rather, uncertainty arises in relation to activities that simultaneously serve shareholder and operational purposes. This is particularly evident where senior management personnel are involved in monitoring investments and group performance while simultaneously providing strategic direction, commercial advice or operational support to subsidiaries. In such circumstances, determining whether an activity is undertaken solely in the capacity of shareholder, or whether it provides a benefit to individual group companies, often requires a tediously detailed assessment of the underlying facts and circumstances.

A particular area of uncertainty concerns the distinction between shareholder activities and stewardship activities. Paragraph 7.9 recognises that stewardship activities may include planning services, technical advice, emergency management support or assistance with day-to-day management. However, the practical boundary between shareholder oversight, stewardship functions and chargeable services is often difficult to establish, especially where activities serve multiple purposes simultaneously.

In practice, disputes frequently arise not because taxpayers or tax administrations disagree on the underlying principles, but because they reach different conclusions concerning the treatment of mixed-purpose activities. In this respect, additional guidance illustrating how activities containing both shareholder and service elements should be analysed would be particularly helpful. More specifically, consideration could be given to examples demonstrating when an activity should be treated entirely as a shareholder activity, when it should be regarded entirely as a service, and when an allocation between shareholder and service components may be appropriate. Such practical examples would significantly improve consistency in the application of the Guidelines and reduce uncertainty in audit situations.

Additional guidance and practical examples would therefore be welcomed. In particular, examples involving modern multinational group structures, regional headquarters, executive management functions and other dual-purpose activities could improve consistency in the application of the Guidelines. Such examples would assist both taxpayers and tax administrations in applying the benefit test and determining when an activity is performed solely because of a shareholder interest.

Overall additional clarification regarding cases of no provision of shareholder activities, the provision of these activities at a redundant amount, the provision of mixed-purpose activities, the distinction between shareholder activities, stewardship functions and other intra-group services, and the possible allocation of activities that contain both shareholder and service elements would contribute to greater certainty and reduce the potential for divergent interpretations.

Question 2. Whether, based on your experience, there are other activities that would commonly meet the definition in paragraph 7.9 of the OECD 2022 Transfer Pricing Guidelines that are not reflected in paragraph 7.10 of the OECD 2022 Transfer Pricing Guidelines.

The examples set out in paragraph 7.10 continue to reflect many of the shareholder activities most frequently encountered in practice. Based on our experience, however, several additional categories of activities commonly satisfy the definition in paragraph 7.9 – in that they are performed solely by reason of the parent company’s ownership interest and would not be activities for which an independent enterprise would be willing to pay – yet are not explicitly addressed in paragraph 7.10.

• Investment portfolio management, evaluation and pre-transaction assessment:
  • A first category relates to activities concerning the management, monitoring and evaluation of the parent company’s investment portfolio. These activities may include assessing the performance of investments in subsidiaries, evaluating acquisition or divestment opportunities, analysing returns on invested capital and determining whether participations should be retained, reorganised or disposed of. Such activities are often undertaken from the perspective of the shareholder and are generally aimed at managing or protecting the parent company’s investments rather than providing a benefit to the subsidiaries concerned.
  • Closely related are pre-transaction activities such as the preparation of investment memoranda, strategic fit analyses and valuation models prepared for the parent’s own investment decision, as well as target screening and acquisition due diligence conducted exclusively in the interest of the parent’s portfolio assessment rather than for the benefit of the target or the group’s operational structure. These activities are performed solely in the capacity of shareholders and would not be activities for which an independent subsidiary would be willing to pay. Explicit recognition of this category would be particularly useful where contemplated transactions ultimately do not proceed and therefore result in no operational benefit for any group entity.
• Capital return activities and credit rating maintenance:
  • While paragraph 7.10(c) addresses the costs of raising funds for the acquisition of participations and related investor relations, two further categories of financing-related activities arise equally relevant in practice.
  • The first category concerns certain parent-level financing and capital structure activities. While financing activities performed for the benefit of subsidiaries may constitute chargeable intra-group services, other activities are undertaken exclusively in relation to the parent company itself. Examples include determining the capital structure of the parent company, assessing parent-level funding requirements, maintaining relationships with shareholders and investors, obtaining financing directly linked to the holding or acquisition of participations, and the implementation of the parent’s capital return policy – including share buyback programmes, dividend resolutions and capital reductions – are undertaken exclusively in the parent’s capacity as issuer and do not confer a benefit on subsidiaries for which an independent enterprise would be willing to pay.
  • The second category relates to activities undertaken to maintain or improve the parent’s own credit rating as an issuer – such as the preparation of rating agency presentations and credit metric management at the parent level – serve the parent’s own refinancing capacity and capital market access. These should be distinguished from guarantee arrangements or other financing support extended in favour of subsidiaries, which generally constitute chargeable intra-group services. Explicit recognition of both categories would provide useful clarification.
• ESG and sustainability reporting obligations of the parent entity:
  • Another category that may warrant consideration relates to certain sustainability, ESG and public reporting activities undertaken exclusively at parent-company level. Increasingly, multinational groups incur costs in connection with sustainability reporting obligations, ESG ratings, investor communications regarding sustainability performance and similar initiatives. To the extent that such activities are carried out solely because of legal, regulatory or listing obligations imposed on the parent company, and do not provide a direct benefit to subsidiaries, they may be conceptually comparable to the reporting, investor relations and governance activities already identified in paragraph 7.10. Explicit examples in this area could enhance the relevance of the guidance for modern multinational groups.
• Shareholder activism response and takeover defence:
  • Activities undertaken by the parent company to respond to shareholder activism or to implement takeover defence measures are performed solely in the interest of the parent’s own shareholders and represent a category not addressed anywhere in paragraph 7.10. Subsidiaries receive no benefit from such activities for which an independent enterprise would be willing to pay. Given the increasing prevalence of activist investor campaigns in modern multinational groups, explicit recognition of this category would be of practical value.
• Certain legal, regulatory and compliance activities:
  • Additionally, certain legal, regulatory and compliance activities may also qualify as shareholder activities where they arise solely because of the legal or regulatory position of the parent company and do not provide any identifiable benefit to subsidiaries. Examples may include obligations that exist exclusively at parent-company level and that would not be undertaken but for the parent company’s status as shareholder.

    In our view, expanding the examples contained in paragraph 7.10 to include these categories would not alter the underlying principle established in paragraph 7.9. Rather, it would provide additional practical guidance and help taxpayers and tax administrations apply that principle more consistently in the context of modern multinational group structures. Particular value could be achieved through additional examples illustrating investment portfolio management, acquisition and divestment assessments, parent-level financing activities, corporate governance functions, sustainability reporting obligations and other activities that are undertaken solely in the capacity of shareholder, while also providing further guidance on the treatment of mixed-purpose activities.

Question 3. The activities that, based on your experience, could be captured by item (e) which refers to “ancillary activities to the corporate governance of the MNE as a whole”.

In line with the above, it is very difficult to imagine concrete activities which are ancillary activities to the corporate governance of the MNE as a whole, and which would be in line with the notion of a shareholder activity definition in paragraph 7.9 of the OECD 2022 Transfer Pricing Guidelines, especially when it comes to SMEs and family-based companies. For such companies, often most, if not all, activities conducted by the shareholder, and which do not already fall under letters a) to d) are commonly not in line with the definition in 7.9. The letters 7.10 a) to 7.10 d) contain examples for shareholder activities and accordingly, allow other activities to fall under 7.9.

BOX 2 – ALLOCATION KEYS

Question 1. Would it be useful to provide further guidance on the application of allocation keys for certain intra-group services?

Yes, without a doubt. In our view, allocation keys represent the area where the revision of Chapter VII could make important practical contribution. This is supported by three main considerations.

First, inconsistent treatment across jurisdictions. We frequently observe that allocation keys accepted by one tax authority are challenged by another, despite being consistently applied, well documented and economically sound. This reflects the absence of a common framework within the OECD Guidelines for assessing their appropriateness, increasing the risk of double taxation.

Second, the lack of objective criteria. While paragraph 7.51 correctly states that selecting an allocation key is "a matter of judgement", the Guidelines provide little guidance on how that judgement should be exercised. We believe an appropriate allocation key should reasonably reflect expected benefits, be measurable and consistently applied, and be protected against manipulation.

Third, insufficient recognition of sector-specific circumstances. The factors that best reflect expected benefits vary significantly across industries. The revised Guidelines should acknowledge that allocation keys may legitimately differ depending on the operational realities of each sector.

To address these issues, we recommend that the revised Chapter VII includes:

1. an indicative table linking common services with recommended allocation keys;
2. guidance on the use of composite allocation keys;
3. clarification on the use of regional versus group-wide denominators;
4. confirmation that, in most cases, a qualitative justification of the allocation key should be sufficient.

Question 2. What are the allocation keys appropriately applied in practice to specific intra group services?

Based on our experience in advising multinational groups, the following allocation keys are typically applied in practice:

We wish to draw particular attention to a practice observed in the pharmaceutic and consumer goods sectors, which raises important policy issues. Certain multinational groups use metrics of physical product volume (number of boxes, units or stock-keeping units sold to third parties) as an allocation key not only for management services (where volume is an intuitive indicator of operational scale), but also for services where the link to product volume is far less obvious, including, legal and regulatory compliance advisory services, financial and audit support services, and regulatory support.

This practice raises legitimate questions. Is there a reasonable link between the number of boxes of pharmaceutical products sold and the benefit derived from legal or regulatory compliance support? At first glance, the connection appears tenuous: a small subsidiary in a highly regulated market may require disproportionately more legal attention than a high-volume distributor with routine operations. However, in highly standardised distribution models, product volume may correlate with the scope of regulatory obligations (pharmacovigilance reports, product-specific documentation, customs formalities) and the administrative workload (invoicing, contract management) in such a way that volume becomes a justifiable indicator.

Furthermore, volume-based allocation keys offer two structural advantages that the current Guidelines do not recognise. Firstly, they are currency-independent: in groups operating in multiple currencies, a turnover-based allocation key requires consistent conversion methodologies and is sensitive to exchange rate fluctuations, whereas a volume-based allocation key avoids this entirely. Secondly, and crucially, volume-based allocation keys are affected from transfer pricing circularity. When turnover is used as the allocation key for services between group entities, the denominator is itself a function of inter-company prices — precisely the prices that are under scrutiny. This circularity is well known in practice, but has not been addressed in the Guidelines. Volume-based allocation keys eliminate this circularity, as they are determined by physical output rather than by pricing decisions.

We have also observed the use of differentiated allocation keys within a single service contract. For example, under a single administrative services agreement, legal and regulatory compliance services may be allocated on the basis of product volume (units sold), whilst human resources services are allocated on the basis of the average headcount. This approach is conceptually sound, as it links each sub-category to its specific profit-generating factor. We recommend that the Guidelines expressly endorse this practice, provided that each allocation key is applied consistently to all beneficiaries and that the total allocation is consistent with the common pool of costs (as required by paragraph 7.50).

Finally, we note the use of regional denominators. Where management services for a specific geographical region are provided by a regional centre, costs are allocated amongst the entities in that region on the basis of regional data (for example, sales by country as a proportion of total regional sales), with direct charges for services specific to each entity. This can produce more accurate results than a group-wide denominator, but it creates complications when both global and regional service providers coexist. We recommend that the Guidelines address the conditions under which the use of regional denominators is appropriate.

Beyond the specific questions raised in the discussion draft, we wish to raise a separate matter that, to our knowledge, is not addressed either in the current OECD 2022 Transfer Pricing Guidelines or in the discussion draft: the use of the commercial contribution — understood as gross profit in absolute monetary terms (turnover minus cost of goods sold), — as an allocation key for the share of intra-group service charges among group entities.

We consider that the commercial contribution can be a useful allocation key, but its suitability depends significantly on the nature of the cost being allocated and the functions performed by the entities involved.

The underlying rationale is straightforward. The commercial contribution represents, to a meaningful extent, the economic value generated by the commercial activity before absorbing operating expenses. For certain intra-group services — particularly those designed to support the commercial or procurement activity of group entities — the commercial contribution can approximate the expected benefit derived from the service more accurately than turnover alone or other traditional allocation keys.

Also, in groups where the recipients of the services have different profiles (manufacturer, rework, services, logistic centre, distribution, low-risk distributor, purchase centre) the commercial contribution can address the value adding activity of each entity more precisely than the turnover, for example.

BOX 3 – SHARE-BASED PAYMENTS

Question 1. Do you encounter challenges associated with the appropriate treatment of stock or share based compensation in relation to intra-group services? If so, please describe these challenges and whether they include timing, accounting treatment and valuation of stock or share based compensation?

The treatment of stock- or share-based compensation (SBC) in the context of intra-group services remains one of the more complex transfer pricing issues, particularly for multinational enterprise groups operating centralized equity incentive plans.

The main challenges typically arise in the following areas:

• Timing of the recharge and deductibility:
  • Different jurisdictions recognize stock-based compensation at different points in time (e.g., grant date, vesting date or exercise date). This often creates timing mismatches between the entity recognizing the accounting expense and the entity receiving the benefit of the employees' services, potentially resulting in temporary or permanent transfer pricing adjustments and tax mismatches.
• Accounting treatment:
  • Differences in the application of IFRS 2 or local accounting standards may lead to inconsistent recognition of stock-based compensation across jurisdictions. Challenges frequently arise where the parent company settles the equity award while the employing subsidiary recognizes the accounting expense, or where no recharge mechanism exists despite the subsidiary recognizing the relevant cost.
• Recharge mechanisms:
  • A key issue concerns whether the recharge of stock-based compensation between associated enterprises should be treated as a pass-through cost or included in the cost base of intra-group services. This question is particularly relevant where services are remunerated under a cost-based transfer pricing method, as jurisdictions may differ on whether stock-based compensation should attract a mark-up.
• Valuation:
  • Determining the appropriate value of stock-based compensation can be challenging, particularly where the accounting expense differs from the actual economic cost incurred by the parent company. Questions may arise as to whether the recharge should reflect the grant-date fair value under IFRS 2, the vesting-date expense, the exercise-date value or the actual cost incurred.
• Consistency with the benefit test:
  • Tax authorities may scrutinize whether the employing entity derives an economic benefit from the equity incentive plan sufficient to justify a recharge. This is particularly relevant where the plan is intended primarily to incentivize executives in their capacity as employees of the multinational group rather than of the local employing entity.
• Transfer pricing implications:
  • Where intra-group services are remunerated under a cost-plus method or another cost-based methodology, it is necessary to determine whether stock-based compensation should form part of the cost base used to calculate the arm's-length remuneration. Divergent practices across jurisdictions increase the risk of inconsistent outcomes and double taxation.
• Documentation and policy consistency:
  • Multinational groups frequently face challenges in ensuring that transfer pricing documentation, intercompany agreements, accounting records and payroll reporting consistently reflect the treatment of stock-based compensation. A clearly documented group policy is therefore essential to support the adopted approach during tax audits.

  These issues often require close coordination among tax, finance, accounting and human resources functions to ensure consistency and alignment with both the OECD Transfer Pricing Guidelines and the applicable accounting standards.

  From a transfer pricing perspective, the analysis should begin by assessing the functional and economic rationale for including stock-based compensation within the remuneration of intra-group services. Consideration should be given to whether the SBC expense represents a cost incurred for the benefit of the service recipient and whether it should be included in the cost base under the selected transfer pricing method (e.g., Cost Plus Method or TNMM). The analysis should also address the consistency between the transfer pricing policy, the intercompany agreements, the applicable accounting treatment (IFRS 2 or local GAAP) and the recharge mechanism implemented within the group.

  In addition, particular attention should be paid to the timing of recognition, the valuation methodology adopted and the treatment applied in the relevant jurisdictions in order to identify potential timing mismatches, non-deductibility issues or risks of double taxation. Where appropriate, the selected approach should be supported by benchmarking analyses and consistently reflected in the group's transfer pricing documentation.

  Additional OECD guidance on the transfer pricing treatment of stock- or share-based compensation in the context of intra-group services would therefore be highly beneficial, as current practices differ significantly across jurisdictions, creating uncertainty and increasing the risk of disputes and double taxation.

  In particular, further guidance would be welcome on:

  • whether stock-based compensation should be included in the cost base when applying cost-based transfer pricing methods (e.g., Cost Plus Method or TNMM), and under which circumstances such costs should attract a mark-up;
  • the interaction between transfer pricing principles and accounting standards, particularly IFRS 2, including whether the accounting expense should constitute the appropriate basis for determining the arm's-length charge;
  • the distinction between shareholder costs and operating costs, providing practical criteria for determining when stock-based compensation benefits the employing entity and when it should instead be regarded as a cost incurred solely for the benefit of the parent company;
  • the appropriate valuation methodology, including whether the relevant measure should be based on the grant-date fair value, the vesting-date expense, the exercise-date value or the actual cost incurred by the parent company;
  • the appropriate timing of any recharge, taking into account that accounting recognition and tax deductibility frequently occur at different points in time across jurisdictions;
  • the treatment of different equity incentive arrangements, including stock options, restricted stock units (RSUs), performance shares and other long-term incentive plans, which may give rise to different transfer pricing considerations; and
  • documentation expectations, including examples of best practices for supporting the economic rationale of SBC recharges and demonstrating compliance with the arm's-length principle.

  Finally, practical examples illustrating common business models, recharge mechanisms and acceptable transfer pricing approaches would be particularly valuable. Such guidance would enhance consistency among tax administrations, reduce the likelihood of disputes and provide greater certainty for multinational enterprise groups implementing global equity incentive plans.

  CLOSING REMARKS

  We commend Working Party No. 6 undertaking this important revision of Chapter VII of the OECD Transfer Pricing Guidelines. We would welcome the opportunity to discuss these comments at the public consultation scheduled for November 2026.

   

  Crowe Office	Firm	Authors of the comments
  Crowe Spain	Crowe Legal y Tributario B&M, S.L.P.	Mariana Robles Álvaro Salvadores Jaime Mariscal
  Crowe Italy	Crowe Valente	Piergiorgio Valente Federico Vincenti Pietro Schipani
  Crowe Poland	Crowe Poland	Emil Wilczyński Maja Lipińska
  Crowe Germany	RWT Crowe GmbH	Dr. Gilad Tirosh Martina Henning
  Crowe Germany	Möhrle Happ Luther Partnerschaft mbB	Torsten Hopp Annette Groschke
  Crowe Belgium	Vandelanotte	Joke Gysens Febe Louage