Anticipated changes to the OECD Transfer Pricing Guidelines regarding intra-group services

Law firm Pepeliaev Group advises that the OECD is carrying out a public consultation on the scope of the future revision of Chapter VII (Intra-Group Services) of the Transfer Pricing Guidelines. The issues proposed for consideration attest to the changes in the approaches OECD countries are taking to substantiating expenses on intra-group services and to whether it is possible to bring such approaches considerably closer to the practices of Russian tax authorities

The OECD has published on its website[1] an invitation for the public to make comments on the scope of the future revision of Chapter VII (Intra-Group Services) of the Transfer Pricing Guidelines. Comments from interested parties will be accepted no later than 20 June 2018 and will be made publicly available.

At this stage, the OECD has defined and proposed for discussion a number of challenges in the practical application of the current version of Chapter VII of the Transfer Pricing Guidelines. These difficulties relate to the assessment of whether charging intra-group services is substantiated; they require further analysis and potential future amendments to the Guidelines.[2]

Such challenges include the following:

• that intra-group services have indeed been provided, in other words, whether there is proof that a service has actually been provided;
• that the customer of an intra-group service receives an actual benefit from acquiring it;
• when intra-group services are assessed, a distinction should be drawn between: (1) activities of group’s headquarters which do or do not benefit the local affiliate that receives the service, (2) benefits that arise by default from group membership and those that arise from a group members taking deliberate, concerted action, and (3) shareholder activities and management activities;
• the need to identify duplicated activities in the operations of units of a company that acquire services, and in the operations of the group’s headquarters that provide such services;
• finding appropriate allocation keys for charging intra-group services;
• determining the costs that should or should not be included in the cost base of the remuneration of the service provider for the services provided to companies of the group;
• assessing whether arm’s length conditions are complied with for services provided in connection with the use of intangible assets; services that are highly integrated with the value creation of the Group; and/or involve significant risks.

Certain challenges reveal the possibility of bringing the OECD approach considerably closer to the approach Russian tax authorities take when they assess intra-group services and of toughening tax control by OECD member states over the corresponding transactions.

The challenges raised are considered in terms of formulating general OECD approaches to transfer pricing under transactions involving intra-group services. At the same time, these issues are directly connected with the most topical challenges for Russian taxpayers in terms of how to prove that services were actually provided, that services were aimed at the recipient (customer) of such services obtaining a benefit/income, and whether it is correct to determine the value of services based on the service provider’s general expenses which are not associated with the types and scope of the services in the relevant period.

What to think about and what to do

Our current practice of providing legal support under cross-border transactions reveals certain challenges in interactions between Russian taxpayers and foreign entities of the group which provide them with services. This pertains to whether transaction documents are drawn up properly and the pricing information is disclosed, because the requirements and practices of Russian tax authorities differ to a great extent from the standards adopted in many OECD countries.

We believe that addressing such challenges at the level of the Transfer Pricing Guidelines will help to significantly change the existing practice of how taxes are administered in OECD member states. Such changes will require parties to a transaction to disclose more information regarding the substance and pricing of a transaction and to document such transactions in more detail.

That Chapter VII of the Transfer Pricing Guidelines will be changed will influence the practice of tax administration in OECD countries, which will trigger the need to adjust intra-group contracts and to amend the corresponding document flow.

Help from your adviser

Pepeliaev Group’s experts will keep monitoring changes in the OECD's approaches to the accounting for spending on intra-group services and will inform you of any such changes.

We possess extensive experience of providing tax support in transactions involving intra-group services and settling tax disputes when tax authorities challenge such transactions and/or their prices. We are ready to provide legal assistance in drafting new contracts or revising existing ones, and in developing pricing methodologies and forms of accounting documents.For these kinds of projects we will be pleased to partner with foreign tax advisors whose involvement may be needed to take account of the changes in the OECD’s approaches at the level of overseas parent companies. Pepeliaev Group is a member of Taxand, a worldwide network of tax advisors, which brings together the best national tax-advising firms operating in the major economies around the world.