TRANSFER PRICING CASE STUDIES
WORKSHOP
SAN JOSE
31 MARCH - 4 APRIL 2014
6. Intra-Group Services and CCAs
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The opinions expressed and arguments employed herein are those of the author and do not necessarily reflect the
official views of the OECD or of the governments of its member countries.
Types of intra-group services
• All business entities require administrative,
technical, financial and other commercial services
– Management, co-ordination and control functions for the
whole group may also be needed
• Such services may be provided by another entity
within an MNE group, or
• An entity may perform the services itself (in-house),
or
• An entity may acquire services from an independent
party
2
Types of intra-group services
• Intra-group services usually include services
ordinarily performed internally (central auditing,
financing advice, training of personnel)
• Often include services that are typically available
externally from independent enterprises (such as
legal and accounting services)
3
Typical Arrangements
 Parental service arrangements
 Centralised service companies
 Cost contribution/sharing arrangements
4
Parental services
• Provided by the parent company – often on cost
recovery basis, i.e. with no profit element.
• Examples are:
• Group finance
• Group tax
• Legal
5
Parental services
Parent
company
(Holdco)
Subsidiary A
Subsidiary B
Subsidiary C
Provision of services
Management fees
6
Centralised services
• Provided by a service company in the group
– usually on a cost plus basis, i.e. including a profit
element.
• Examples are:
•
•
•
IT support
Technical
Finance and treasury
7
Centralised services
Provision of services
Management fee
8
Cost contribution/sharing
arrangements
• Provided by each group member for the benefit of the
group as a whole always on a cost contribution basis
commensurate with (expected) benefit.
• Examples are:
• Research and development
• Procurement
9
Cost contribution/sharing
arrangements
Provision of services
Allocation of costs
10
Key issues
1) Has an intra-group service has been rendered?
–
Benefit test
–
Shareholder activities?
–
Duplication?
–
Incidental benefits
2) If so, what is the arm’s length price for the
services?
11
Has an intra-group service
been rendered?
Activity
Service
No service
R&D administration
Management of interest and exchange risks
Issuance of parent’s shares
Protection of intellectual property
Raising funds for own new acquisitions
Financial advice
Supervision of cash flows
Interview for director candidates of
subsidiaries
Obtaining high credit rating for belonging to
MNE group
12
Benefit test
• Activity performed must provide to the recipient
with economic or commercial value to enhance its
commercial position.
• Consider whether an independent enterprise would:
– Pay for the activity if performed by an independent
enterprise; or
– Perform the activity in-house
– If not, no intra-group service
13
Rendering of intra-group services
• Existence of an actual payment is useful, but does not
prove that the service has been actually rendered
• Description as a “management fee” is not prima facie
evidence of management services
• Absence of payment does not necessarily mean that
no services have been rendered
• Consider what an independent party would pay, and
what an independent party would charge
14
Examples of services
Planning
Assistance in production,
buying or distribution
Coordination
Budgetary control
Financial advice
Marketing
Recruitment
R&D administration
Accounting
Auditing
Legal advice
IP protection
Market research
Contract R&D *
Factoring
Computer services
Financial services
Provision of guarantees
15
Not services
• Activities not constituting services:
Shareholder activities
Duplication of services
Incidental benefits / Passive association
16
Shareholder activities
• Costs related to juridical structure of the parent
company itself
• Costs related to reporting requirements of the
parent
• Costs related to raising funds for the acquisition of
its participations
17
Duplicative services
• Covers those services already performed by the
recipient or by an arm’s length party on its behalf.
• However, duplication could be accepted under
certain circumstances, e.g. temporary duplication.
18
Incidental benefits / Passive association
– Covers services performed by one group member
(e.g. shareholder or coordinating centre) for a
particular group member or a set of group member,
and incidentally provides a benefit to other group
members.
– Examples in TPG para. 7.12 - 7.13
19
Special considerations
•
On call services
– Frequency of use?
– Degree of benefit obtained
– Consider facts and circumstances
•
Aggregation/segregation
– E.g. higher price for products because R&D is embedded in
the product, rather than a separate service charge
20
Has an intra-group service
been rendered?
Activity
Service
No Service
Business operation management through weekly television
conferences
Collect monthly financial, product and sales data of
subsidiaries in order to make parent company’s internal
reports
Review budget plans drafted by subsidiaries
Parent company’s internal auditor visit subsidiaries and give
suggestions on business operations
Check data transferred from subsidiaries for parent
company’s consolidated accounts
Check contract documents made by subsidiaries with third
parties, and give legal advice
External auditors attend subsidiaries audits for parent
company’s consolidated accounts
Develop and maintain IT system, which can deal with client
complaints and connect the parent company and subsidiaries
21
The arm’s length price
• Arm’s Length Price Setting
Minimum price
acceptable for provider
Maximum price
acceptable for recipient
Range of
AL prices
22
The arm’s length price
• Transfer pricing methods most commonly used for
services:
 Comparable Uncontrolled Price (CUP)
 Cost Plus
 Combination of methods or TNMM
23
CUP
• Preferable when:
There is a comparable service provided between
independent enterprises in recipient’s market
The associated enterprise providing the service also
renders it to independent enterprise in comparable
circumstances.
• Examples: accounting, auditing, legal or computer services
being provided.
• Careful! Service infrastructure might impact the price!
24
Allocation of costs
• Management fees charged as percentage of sales of
the service recipient, e.g. 5% of the sales of the
service recipients, possible?
• Management fees should be based on the cost of
service rendered
– Actual vs. budgeted cost
• Direct and indirect allocation
25
Direct cost allocation
– Group members are charged for specific services
– Identify the costs incurred for a particular service to
a specific affiliate
– Provides greater transparency to the tax authorities
– Costs and time associated with supplying the
services will be straightforward to identify
– Examples:
–R&D performed by central R&D department for a specific
company or client
–Marketing from the central department provided for a
specific market or region
26
Indirect cost allocation
• Used where proportion of the value of services
rendered to each entity cannot be exactly quantified
• Identify all relevant costs and allocate them among all
recipients using a sensible allocation key(s)
• Indirect cost allocation method must:
– Be sensitive to commercial features of individual case
– Contain safeguards against manipulation
– Follow sound accounting principles
– Produce allocations of costs that are commensurate with
actual or expected benefit
27
Cost allocation keys
Intra-group service
Cost allocation key?
Technology services
Central purchase of raw materials
Marketing support
CEO’s strategic advice
Personnel advice
Payroll services
Central R&D
Strategic product planning
Financing, accounting
Rental charges/property services
An indirect charge method may need some adjustments to achieve an
arm´s length price. Combination of allocation keys is sometimes useful.
28
The arm’s length price
• Consider perspectives of both
– Service Provider and
– Service Recipient
• Provider
– How much does the service cost?
• Recipient
– How much is the service worth?
– How much would it cost to provide the service in-house?
– How much would a comparable enterprise pay for the
service?
29
Cost plus
• Applicable in the absence of a CUP where
activities, assets and risks are comparable
• Cost base is very important
• Mark-up: special considerations
30
Cost plus mark-up?
• Normally mark-up (comparison with independent
enterprises)
– Factors to consider: nature, significance of the service,
efficiency of the service supplier…
• In some cases no mark-up required (OECD
Guidelines paras. 7.33 - 7.37):
–
–
–
–
Group enterprise acting as an agent or intermediary
The costs are already equivalent to the market price
Unreasonable administrative burden
Safe harbours for service mark-up in some countries
31
Cost Contribution Arrangements
• Framework agreed among enterprises to share the
costs and risks of developing, producing or obtaining
assets, services, or rights, and to determine the nature
and extent of the interests of each participant in those
assets, services, or rights.
• A contractual arrangement rather than a judicial entity
or permanent establishment
32
Participants’ Shares
• In a CCA, each participant’s share of contributions to
the arrangement will be consistent with their share of
expected benefits.
• Each participant would be entitled to exploit their
interest, without paying a royalty or other
consideration.
A typical CCA
Joint development of an
intangible and associated
product
33
CCA: an illustration
Participant
Contributions
Benefits
CCA
Contributions
Contributions
Benefits
Participant
Benefits
Participant
34
Cost Contribution Arrangements
• Resource and skills are pooled and the consideration
is the reasonable expectation of mutual benefit
• Benefits may be
– known in advance or uncertain
– immediate (e.g. services) or expected over a longer
term (e.g. R&D)
35
Types of Cost Contribution
Arrangements
• Joint development of intangibles – each participant
receives a right to exploit the resulting intangible
property
 No royalties
• Joint provision of services that each entity provides and
receives
 Separate service company rewarded on an arm’s length basis
– generally not a participant
 Acquisition of property for mutual use
36
Applying Arm’s Length Principle
• The expectation of mutual benefit is fundamental to
the acceptance by independent enterprises of an
arrangement for pooling resource and skills without
separate compensation
• Each party’s contribution is determined by the expected
benefits
• Benefits are expected, but the CCA may not be
successful
37
Is the allocation appropriate?
• Estimating the share of benefits expected to be
obtained by each participant, and allocating
contributions in the same proportions. For instance:
 Based on the anticipated additional income generated or
costs saved by each participant.
 Using the price charged in sales of comparable assets and
services.
 Using an allocation key or a combination of allocation
keys (sales; units used, produced or sold; gross or
operating profit; the number of employees; capital
invested; etc.)
38
Balancing payments
• A participant may be required to make a
payment to other participants to adjust its share
of contributions
• Balancing payments are used to maintain the
arm’s length nature of the CCA
• They do not constitute a royalty for the use of
the intangible
• Generally treated as a cost to the payer and a
reimbursement to the recipients
39
Entry, withdrawal, and termination
• A new participant to an existing CCA might obtain an
interest in the results of prior CCA activity: any transfer of
pre-existing rights from existing participants to a new
entrant must be compensated
 a buy-in payment.
• A participant who leaves a CCA may dispose of its interest
in the results of past CCA activity  a buy-out payment.
• When a CCA terminates, each participant should receive a
beneficial interest in the results of the CCA activity.
40
What if a CCA is not arm’s length?
• When the consideration received / paid by a
participant is inadequate, or excessive…
 The arm’s length principle requires an adjustment (often
through a balancing payment)
 In some cases, part or all of the terms of a CCA may be
disregarded if commercially the substance (reality)
differs from the form
41
Arm’s length structuring of CCAs
a) Participants include only enterprises expected to derive
benefit from the CCA activity
b) Arrangement specifies the nature and extent of each
participant’s beneficial interest.
c) No payment other than CCA contributions, balancing & buyin payments made for the beneficial interest.
d) Proportionate shares of contributions determined in a
proper manner.
e) Arrangement allows for balancing payments or for the
allocation of contributions to be changed prospectively.
f) Adjustment made as necessary upon entrance, withdrawal
and termination of the CCA.
42
CCA vs. Intra-group services
CCAs on services not creating IP Intra-group services
Agreement to share costs, risks and Limited to the provision or
benefits where all participants acquisition of a service by
members of the MNE Group. The
contribute in cash or in kind.
risk of not successfully and
efficiently providing the service is
generally borne solely by the
service provider.
If participants join or leave a CCA,
shares should be adjusted or
rebalanced in accordance with the
arm’s length principle.
Terminating or extending the
service agreement to other
participants has generally no
implication on other service
recipients.
43
CCA vs. Intra-group services
CCAs on services not creating IP Intra-group services
As all participants are contributing
to a common activity and share
costs and the contributions reflect
the expected benefits;
contributions are usually valued at
cost.
The allocation of the costs is
based on the expected benefits
for each participant from the CCA.
The profit element charged by the
provider of the service is usually a
key element as the provider will
not share profits with the
recipients.
The allocation key is based on
the extent each company has
requested / received or is
entitled to the service.
44
Questions and/or
comments?