Considerations for international service charges

Tax authorities often place a great focus on services charges and transfer pricing practices when examine the affairs of multinational enterprises. If the contracts for services are not determined using appropriate market values then, according to tax authorities, it could indicate that the profits of the enterprise are being shifted between jurisdictions. Please remember that tax authorities will always endeavor to ascertain the real nature of the services purchased and all resulting benefits, and in some circumstances may disregard the description of services as provide in accompanying contract documentation.

We recommend that multinational enterprises follow several basic rules and considerations to which tax authorities and auditors are likely to pay great attention.

  1. Determine and validate the ultimate benefits that will arise from the purchase of a service.
  2. Confirm whether the supplier has the realistic ability to provide the services purchased in full.
  3. Validate the basis of charges for international services.
  4. Confirm that the same service could not be provided by your own enterprise (or any intergroup companies).
  5. Use the cost-plus method to set charges for international services.
  6. Confirm that the charges are priced in line with those offered by the provider to external third parties.
  7. Confirm and enforce that the director and/or chief executive do not simply provide investment monitoring services.
  8. Confirm that all investment agreements and loan contracts are set in line with appropriate market values and are fully chargeable.
  9. When buying agent’s or intermediary services, determine and provide fiscally prudent reason for the decision.
  10. Confirm that all mark ups are fair and set in correspondence to market values and undertaken risks.
  11. When buying the service, do not consider branches, associated companies, intergroup companies, and other entities with the same beneficiary owner as independent partners, and apply arm’s length transfer pricing practices. Also confirm that the local managers are informed of, and follow, all applicable transfer pricing rules.
  12. Consider all corresponding and arising tax obligations.

Unfortunately, service charges have often been used as a cover for illicit money laundering, and tax authorities around the world have zero tolerance for such actions. Due care and diligence must always be taken when signing off on any cross-border transactions, especially when concerning service charges.

For greater detail on current guidelines and procedures see Chapter VII “Special considerations for intra-group services” of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations“.

September 7th, 2011