OECD’s Intragroup Services Rewrite Needs Its Own Benefit Test

The OECD addresses a relevant, important issue in its June 1 public consultation document on special considerations for intragroup services. But the document fails to provide practical solutions for transfer pricing practitioners.

Taxpayers and tax authorities have long struggled over the lengthy but largely unhelpful Chapter VII of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which serve as the cornerstone of dozens of countries’ transfer pricing rules.

Intragroup services are one of the most prevalent forms of intercompany relationships. Chapter VII’s discussion on how to delineate and price these transactions provides limited guidance for the everyday issues that most multinational enterprises encounter when they design and implement their transfer pricing policies.

These real-world concerns fall into three main categories:

• Technical definitions and methodology
• Reducing double taxation risk
• Minimizing compliance burden

The public consultation document provides partial relief on the first but represents backward progress on the latter two—a missed opportunity for those who set and follow transfer pricing rules.

The discussion draft is on its soundest footing in identifying and addressing Chapter VII’s shortcomings on delineation and pricing of related party service transactions. Modern taxpayers engage in highly integrated, complex transactions, and the public consultation document rightly points out that the boundaries of services and intangible assets blur in the context of, say, a group that leverages technology platforms to automate administrative needs across the group.

However, the Organization for Economic Cooperation and Development seems unable to resist the siren song of academic theory. The public consultation document devolves into a dissertation on “the concept of benefit,” which does little to help an in-house tax function owner trying to develop and roll out a workable transfer pricing policy.

Likewise, the discussion draft is correct in identifying the need for flexibility in transfer pricing methods applied to intragroup service transactions. But its suggestion to consider two-sided methods or recipient-side analysis is later confounded by its context-light commentary on the fact that transactions bundling services and other transactions should still consider unbundled pricing of the service component.

The document’s most regrettable failure is that it neither reduces the scope for double taxation nor relieves multinationals of the lengthy, uncertain compliance burden associated with intragroup service transactions.

Having spent my entire career advising multinationals ranging from pre-revenue startups to Fortune 50 conglomerates, I can confidently say that at least 95% of taxpayers don’t intend to base erode or artificially shift profits by manipulating pricing for cross-border services. The vast majority rely on the OECD transfer pricing guidelines to set reasonable parameters promoting arm’s-length outcomes and tax certainty.

Yet the public consultation document reflects a clear auditor bias. Take its elaborate call for a more forward-looking, jurisdiction-by-jurisdiction benefit test. This is fodder for jurisdictions that already employ an aggressive reading of the benefit test to declare intragroup service payments invalid or non-deductible.

Also, the discussion draft proposes no solution for one of the most significant causes of double taxation—the treatment of stock-based compensation related to the services cost base (though it does solicit commentary in three generically worded questions). Taxpayers hoping to follow rules in exchange for avoiding opacity and overlap in their income tax base will be justifiably disappointed.

Similarly, the public consultation document exacerbates the problem of spiraling documentation requirements for taxpayers regardless of size or transaction materiality. Rather than providing a clear, stratified framework for sufficient proof of benefit provided and received, the discussion draft puts forth a laundry list of possible evidence ranging from IT tickets to internal emails between service providers and recipients.

Putting aside the most obvious challenge that many intragroup services are imperfectly analogous to those occurring in third-party contexts, the OECD’s prescriptions betray old-economy thinking in an age of automation technology and self-executing actions. They also ignore the immense range of administrative and technical ability of different taxpayers to compile and synthesize the recommended documentation.

It’s hard to escape the feeling that taxpayers are being asked to work harder, even as tax authorities are being handed broader discretion to reject their approach.

The OECD’s fact-focused, analytical rigor should be balanced with administrability and cross-border consistency though improvements such as expanded recommendations for safe harbors, materiality thresholds, and opportunities for streamlined documentation requirements.

The public consultation document arrived at the right moment but with the wrong content. Those who plan to respond to the OECD’s solicitation of public commentary should consider taxpayers’ core needs for tax certainty and administrative relief so that the ultimate revisions to Chapter VII pass the benefit test.

This article does not necessarily reflect the opinion of Bloomberg Industry Group Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Chad Martin is a principal of transfer pricing services at Eide Bailly.

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