Thursday, February 25, 2016

OECD and G20’s Guide to Low Value-Added Intra-Group Services

The OECD and the G20 provide specific guidance within the Transfer Pricing Guidelines for low value added intra-group services.1 Section D of Section VII within these Guidelines specifically addresses these low-value added intra-group services. The official text of these provisions refer to "value adding" activities rather than to "value added" activities. The authors of this piece use the more commonplace standard, value added. The OECD and G20, as transnational institutions, divide Section D into four parts:
 Section D1 contains the OECD and G20 definition of "low value added intra-group services."
 Section D2 provides for a simplified benefits test. This section sets out a simplified benefits election for the multinational enterprise. The simplified approach determines arm's length charges for low value added intra-group services.
 Section D3 contains guidance for the OECD and G20's documentation and reporting requirements. The multinational enterprise needs to meet these requirements when electing to apply this simplified transfer pricing approach.
 Section D4 addresses the levying of withholding taxes and customs issues that apply when the multinational enterprise provides low value added intra-group services.
The transnational organizations' "simplified cost approach, or just the "simplified approach," undertakes a process the OECD and the G20 had designed to achieve three cost allocation objectives:
 The simplified approach recognizes that the arm's length price for low valued intra-group services is "closely related" to the relevant costs.
 The simplified approach allocates the costs of providing each category of such services to these group companies that benefit from using these services.
 The simplified approach applies the same mark-up to all services categories.
The OECD and the G20 make clear that the multinational enterprise and its ensuing tax administrations have the choice of (a) applying the simplified approach to low valued added intra-group services or (b) rejecting the simplified approach. The transnational organizations specify that a multinational enterprise that elects not to apply this simplified approach must follow other Chapter VIII services provisions in the Transfer Pricing Guidelines.
Defining Low Value-Added Intra-Group Services
The OECD and the G20 specifically address the definitional issues relating to low value-added intra-group services. The transnational organizations provide multinational enterprise and its ensuing tax administrations with the option of (a) applying the simplified low value added intra-group services costs approach, or (b) rejecting this simplified method and, instead, apply other transfer pricing services provisions within the Transfer Pricing Guidelines. The transnational organizations specifically address four issues that define the scope of the simplified approach:
 Definitional issues.
 A description of the mandatory characteristics that the multinational enterprise's services must have in order for the enterprise to qualify as low value added services when applying the elective simplified approach.
 The transnational organizations identify a series of ineligible transactions, i.e., activities of the multinational enterprise that do not qualify for low value added intra-group services for purposes of applying the simplified approach.
 A list of services examples that would likely have the qualification characteristics, qualifying these services as low value added intra-group services under the simplified services approach.
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