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How to defend Intra-Group service payments in transfer pricing?

Intra-group services are provided between the Multinational Enterprise (MNE) members. These services can be of any sort, for instance, services related to IT, Human resources, Marketing, Legal, Accounting and administration, Technical Services, Quality control services, and Other services like research and development, corporate security, logistics, etc.

While an MNE looks at itself as one unit, due to fiscal boundaries between the countries, a value must be assigned to transfer such services from one country to another. This helps in fair and rightful payment of taxation in the country where the value is generated.

Step 1 – Recognise an intra-group service

For recognising an intra-group service, a benefit test is required, where two conditions need to be met:

1. Whether the service rendered by one group company provides economic or commercial value, improving or maintaining the commercial position of the Associated Enterprise.

 2. Whether a third party will be willing to pay for the same.

Therefore, an intra-group service will be recognised only when both tests are fulfilled. When one of the two tests is not met, the payment against such a service would generally be disallowed. It is in the taxpayer’s interest to undertake robust transfer pricing documentation to detail such recognition criteria for the intra-group services.

The benefit can also be ‘‘expected benefit’’ for example, in the case of marketing activities, for an MNE that provides intra-group marketing services, such activities might be realised not in the same year but rather in the following years. Such “expected benefit” would generally be chargeable in the year the service is rendered.

Step 2- Verifiable evidence

These services must be corroborated with verifiable evidence demonstrating the services were rendered and received for which a service charge is applicable. Examining the facts and circumstances will be required to determine whether the benefits test has been satisfied for an enterprise receiving an intra-group service. The level of detail covered by such an objective examination, and the amount and nature of documentation required to demonstrate satisfaction with the benefit test, should be based on the materiality of the service charges. One should also keep in mind that the service provisions are not duplicated, and the services are not provided to an entity twice, which may go against the benefit test.

Step 3 – Determining service fee

The Transfer pricing services charge should be made and accepted between independent parties in a comparable transaction under arm’s length conditions. To calculate arm’s length transfer pricing for an intra-group service, you need to consider: the value of the service to the receiving company, the amount an independent enterprise would be willing to pay for it in comparable circumstances, and the service provider’s costs. You can use several transfer pricing methods to calculate an arm’s length transfer price. The most commonly used are the comparable uncontrolled price (CUP) method or a cost-based method such as the cost plus method or the cost-based transactional net margin method (cost-based TNMM). Allocation of expenditures through a direct or indirect method is also essential in determining the value to the service in the form of a service fee.

Step 4 – Check if the services are Low value-adding intra-group services

The OECD has previously introduced an elective, simplified approach for pricing low-value-adding intra-group services to limit taxpayer compliance costs. Qualifying services (being services which are supportive in nature, not part of the core business activity and do not involve unique and valuable intangibles or the assumption of or control of significant risk by the service provider) may be priced at cost plus a 5% mark-up without the need to undertake benchmarking analysis.


Intra-group service is one of the sought-after issues in transfer pricing. Services being intangible in nature has been one of the top-rated by tax authorities to have the potential of tax avoidance. Accordingly, for taxpayers, it is essential to understand the importance of documentation of intra-group services and maintaining records.

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