Transfer Pricing considerations for intra-group services

Almost all groups will have intra-group services of some kind. Often, the services arise because it is more efficient and economic to centralise certain activities, such as various back-office services (e.g. IT, legal, finance, management, marketing, research and development etc.). These services are typically carried out by the parent company or by a group service centre or by a head office.

Some countries have specific legislation, regulations or guidelines on this, but in most cases many rely on the guidance included in the OECD Transfer Pricing Guidelines (TPG). 

With respect to Malta, currently there are no sophisticated Transfer Pricing (TP) rules, however the Commissioner for Revenue is expected to publish TP Rules during the last quarter of 2022, which should make reference to the OECD TPG. Following which, we should also expect to have some guidelines.

In this short read we shall briefly explain the main key points of an intra-group service.

Did you receive a service?

For an intra-group service fee to be arm's length, you must be able to prove with verifiable evidence that you received the services for which you get a service charge. The service in question should provide the related party with economic or commercial value that enhances its commercial position. One of the tests that one can make is to determine whether a third party would be willing to pay for the same service that the related party has received.

If the answer is no, then the service should generally not be considered as an intra-group service under the arm’s length principle.

person signing cheque book

How do you determine an arm’s length service fee?

Having determined that a service has been rendered, the next step would be to determine the appropriate price to charge to the related party. Very briefly, the charge should be that which would have been made and accepted between independent parties in a comparable transaction.

Where there is evidence that the service provider renders similar services to both related and independent parties then the direct method (where associated enterprises receiving the service are charged directly for that service) will be the most preferred method. 

If, however, it is difficult to apply the direct method (because the same service is not provided to a third party), then the indirect method should be used. The indirect method is based on an apportionment amongst various associated enterprises which rely on estimation and allocation of costs. A typical example of the indirect method would be in a situation where there is a shared service centre. The shared service centre would be providing services such as legal, accounting, human resources etc. which are centralised for efficiency purposes. The shared service centre would allocate a cost to its related parties based on the usage of such services.

The European Union Joint Transfer Pricing Forum published a report on low value adding services. Low value adding intra group services are defined as those which are:

  • supportive in nature, 

  • 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. 

people discussing around a table

The simplified approach to the determination of arm’s length charges provides that where appropriate, the service provider shall apply a markup within a range of 3%- 10%, often around 5% of the relevant cost (subject to the facts and circumstances that may support a different markup). The markup under the simplified approach does not need to be justified by a benchmarking study.

In view of the fact that it's becoming very common to have groups having intra-group services it is recommended that groups should ensure that they have transfer pricing documentation in place.

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