The OECD issued a discussion draft on 3 November 2014 in connection with Action 10 of the BEPS project. This relates to modifications to the OECD Transfer Pricing Guidelines in respect of low value adding intra-group services. The discussion draft includes a draft Chapter VII (Special Considerations for Intra-group Services) to the Guidelines.
Many countries consider that their tax base is eroded by taxpayers who pay excessive management fees and head office expenses to related parties in lower tax jurisdictions. The OECD guidance looks at ways of protecting the tax base of these countries while arriving at appropriate fees for legitimate low value added services.
The identification and treatment of low value adding services involves the following steps:
- The discussion draft contains a description of a wide range of intra-group services for which the fees require a very limited mark-up on cost because of their routine nature, and a list of services that are not regarded as low value-adding;
- The draft then sets out a consistent application key for allocating the costs of the services among the recipients; and
- The report recommends specific reporting requirements that would include documentation of the way in which the specific cost pool was calculated.
The discussion draft therefore contains a general definition of low value-adding services. These are services performed by one or more members of a multinational group on behalf of other group members that are supportive in nature; not part of the core business of the group; do not require the use of unique intangibles or create such intangibles; and do not involve taking on significant risk or creating significant risk.
Services that would not be regarded as low value-adding include services that are part of the core business of the group; research and development; manufacturing and production services; sales, marketing and distribution; financial transactions; extraction of natural resources; insurance or services of corporate senior management.
The draft clarifies the definition of shareholder services and duplicative costs in the context of low value adding services. There is then guidance on appropriate mark-ups and cost allocation methods that can be applied in the case of low value adding services.
The draft gives guidance on how to apply a simple benefit test to demonstrate that benefit has been received by the related party from the low value adding services. There is also guidance on documentation that can be prepared to demonstrate that the taxpayer qualifies for the simplified approach to low value-adding services.
The discussion draft includes a suggested Chapter VII that includes the new provisions in respect of low value adding services. This suggested Chapter VII includes more examples in respect of shareholder activities; a note suggesting that costs that would be incurred by the recipient of services if it did the services for itself may be relevant for computing the arm’s length charge for intra-group services; a note that where there is an agent or intermediary for services provided by another party a mark-up only on the costs of the agency services may be appropriate; and revisions to the guidance in respect of contract research and development activities.
Comments on the discussion draft are invited from interested parties by 14 January 2015. Following consideration of the comments received the OECD intends to hold a public consultation on the draft in March 2015.
