The proposed changes are a sign of the adoption of a more flexible approach to the analysis of these intra-group services, based mainly on reasonably foreseeable profits, which could also avoid automatism in tax regularizations.
On 1 June, the OECD opened a public consultation process to update its transfer pricing guidelines for intra-group services (Chapter VII), which will be in force until 22 July. In the words of the OECD, the objective of this review is to provide greater clarity on how to implement the principle of free competition in these operations, without intending to imply an alteration of the general principles in force.
The areas on which the debate between taxpayers and tax authorities in relation to intra-group services has historically focused are, on the one hand, the reality and usefulness of the service and, on the other, its valuation.
In Spain we find numerous judgments and resolutions that address these issues. For example, the resolution of the Central Economic Administrative Court (TEAC) of 23 January 2023 questions both the usefulness of certain services (considering them associated with shareholder activities), and the profit margin applied to others, reducing it from 10% to 5% using the doctrine applicable to low value-added services.
For their part, the judgments of the National High Court of 25 April 2022, 16 September 2021 or 8 June 2020 question the deductibility of the expense for not having sufficiently accredited the reality of the services.
Another relevant example can be found in the judgment of the National High Court of 11 January 2023, in which the deductibility of certain marketing expenses invoiced by third-party customers is denied, as they derive from the application of a global agreement reached by the group with said third parties and the rationality of its distribution within the group has not been proven.
OECD’s new proposal for Chapter VII of its guidelines separates the analysis of the reality and usefulness of the service from that corresponding to its valuation, in such a way that any discrepancies in valuation that may arise do not allow the existence of a remunerable service to be questioned.
In relation to the reality and usefulness of the service, the new OECD proposal continues to maintain the greater importance of substance over form and suggests the development of an ex-ante analysis that allows the operation to be correctly contextualized. Such an analysis should include (i) a complete functional analysis, consistent with the group’s operating model (centralized or decentralized) and organizational structure, and (ii) a benefit test, answering the question of whether a third party would be willing to pay for that service, considering the existence of a reasonable, feasible and probable expectation of profit. On this point, the OECD warns that the service would continue to be understood as useful (and, therefore, remunerable) even if this expectation does not materialize, provided that its reasonableness can be justified.
In this same area, the new proposal delves into non-remunerable activities, such as shareholder activities, duplicate activities or those that provide an incidental profit. And, in relation to shareholder activities, although the current theoretical framework is maintained, the possibility is introduced that certain costs are located in the regional holding company, instead of in the ultimate holding company. The possibility that certain activities may have a shareholder component, and a remunerable component is also recognized.
With regard to duplicate activities, the possibility of them occurring on a temporary basis without preventing their turnover is maintained, for example, in the context of business restructuring. It is also indicated that certain services may be performed by different suppliers, without this being automatically considered a duplication.
With regard to the valuation of services, the proposal incorporates a more far-reaching change, going from recommending the almost automatic application of cost-based methods when it is not possible to apply the comparable free price to considering that there should be no methodological preference, so that the most appropriate method will depend on the specific circumstances of each case. This should provide a solution to certain decentralized structures typical of digital businesses, but also to other traditional activities, such as research and development, in which cost methods do not always allow the value generated by the service provider to be adequately reflected.
In line with the above, the new OECD proposal considers the comparable free price method as the most appropriate when there are similar transactions between independent parties with reliable information and without comparability defects.
Failing this, cost-based methods (increased cost or net operating margin) will be appropriate in the case of services that do not incorporate relevant intangibles or involve the assumption of material risks for the service provider.
However, when it comes to complex services that are highly integrated in the value chain that involve the management of critical business risks, or that involve the use or result in the creation of intangible assets, the OECD considers that the method of sharing the results may be the most appropriate alternative.
The OECD proposal also expands its guidelines regarding the re-invoicing of costs without a profit margin, which would be limited to cases in which the re-invoicer acts as a mere paying agent without adding value, based on customary practices in comparable transactions between independent parties.
Continuing with aspects related to valuation, the OECD proposal continues to maintain that, although it will be usual for the provision of an intra-group service to incorporate a benefit component for the provider, there is a possibility that, in certain cases, this will not be the case. This would happen, for example, when the internal performance of the service is more inefficient than its outsourcing and, despite this, it is preferred to maintain control of these functions within the group for strategic business reasons.
The OECD also expands on the content of the documentation accrediting these operations, albeit with a proportionality approach relative to the materiality of the service. Suggested aspects include the economic rationale for the agreement, effective performance of the services, evidence of expected benefits and a description of the defined remuneration system.
Finally, the proposal maintains unchanged the doctrine relating to the valuation of low value-added services, considering that, in cases where it is applicable, their market valuation may be etermined by increasing the costs incurred in the provision of the services with a profit margin of 5%. However, this system should not be understood as a minimum from which to start to define the remuneration applicable to higher value-added services, requiring a specific comparability analysis.
As can be seen, if this proposal goes ahead, we would be facing a far-reaching modification of the guidelines with regard to the analysis of reality and valuation of intra-group services; which seem to be focused on the necessary analysis, case by case, of these services, which distances taxpayers and administrations from certain acquired automatisms.
