Intercompany agreements for low value-adding intra group services

Apologies to any transfer pricing professionals who find this blog post a bit dull.

After all, what could be less challenging from a TP perspective than low value-adding services? Isn’t it just cost plus 5%, and done?

Well... not quite. One fact which is often overlooked is that – as the slide above shows – the OECD Transfer Pricing Guidelines prescribe certain documentation, in order for the simplified approach for low value-adding services to be available. And that documentation includes appropriate intercompany agreements.

The reason – as far as anyone can say who wasn’t involved in the discussions for establishing the OECD TPG – is that the ‘simplified approach’ is an elective option. In other words, the MNE needs to choose to apply it. And the MNE also needs to choose the scope of the services and the allocation key(s) which are to be applied. The OECD TPG merely give examples of possible allocation keys for low value-adding services; they do not prescribe which allocation key should be used or not used in any particular situation. Similarly, the treatment of third party costs needs to considered and then defined.

Given that the over-arching approach of the OECD TPG that intercompany agreements are the starting point for ‘delineating the actual transaction’, it seems natural that intercompany agreements would be the clearest and simplest way of evidencing the terms of the actual transaction.

And as maintaining that paper trail is needed to minimise unnecessary controversy – which is surely the main benefit we’re trying to give our MNE clients – I’d argue that while this sort of intercompany transaction may seem a little dull, it still deserves our care and attention.