The Maltese Transfer Pricing Guidelines issued in January of this year, set out that the arm’s length charge for low value-adding intra-group services may be determined following the OECD Transfer Pricing Guidelines and EU Joint Transfer Pricing Forum guidelines.
What are low value-adding services?
Low value-adding services refer to supportive services, that are not part of the core business of the group, do not use or create unique and valuable intangibles, and do not involve the assumption, control or creation of significant risk.
Low value-adding services encompass a wide range of activities that support the core functions of a multinational enterprise but do not significantly contribute to its profitability or strategic direction.
The OECD Transfer Pricing Guidelines set out several examples of services which may constitute low value-added services, including:
Routine financial and accounting services such as bookkeeping, invoice processing, and financial reporting;
Human resources activities such as staffing and recruitment, training and remuneration services;
Administrative support such as general office administration and clerical work;
IT services including technical support, software installation, and maintenance tasks that are necessary for the smooth functioning of an MNE's IT infrastructure;
Monitoring and compilation of data relating to health, safety, environment and other standards regulating the business.
The OECD Transfer Pricing Guidelines also set out examples of activities which do not qualify for the simplified approach, including:
Research and development services;
Manufacturing and production services;
Sales, marketing and distribution services;
Financial transactions; and
Services of corporate senior management.
What is the simplified approach for pricing low value-adding services?
The simplified approach, in arriving at an arm’s length price, in terms of the OECD Transfer Pricing Guidelines, consists of the following steps:
Determining cost pools for each category of low value-adding services incurred by group members that conduct these services;
Identify and remove from the cost pool costs relating to services performed solely on behalf of one other group company. These costs are set aside and treated as a separate cost pool to be allocated directly to the beneficiary of the service;
Allocation of low value-adding service costs benefitting several group members using allocation keys;
Adding a 5% mark-up on all costs in the cost pool, except for pass-through costs.
This approach is a straightforward and efficient method for determining transfer prices and also promotes consistency in transfer pricing across different transactions and entities within the MNE.
How can we help?
With the introduction of the Maltese Transfer Pricing Rules, it is now even more important to analyse cross-border intra-group transactions and ensure compliance with such Rules.
Our team can help you with the review and evaluation of your current transfer pricing position, including assessing whether any transactions fall within the definition of low value-adding services and providing practical recommendations to manage risks and realise opportunities.
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