In an environment of increasing international scrutiny, intragroup service transactions have become one of the main areas of focus for tax authorities.
Multinational groups often centralize administrative, financial, commercial, or technical functions with the aim of generating operational efficiencies and economies of scale. However, these types of structures also increase the tax risks associated with Transfer Pricing, especially when there is insufficient economic substance to support charges between related companies.
Currently, tax authorities no longer evaluate only the agreed-upon price, but also the economic reality and the actual benefit derived from the service provided.
The Economic Benefit Test
According to OECD guidelines, particularly Chapter VII on intra-group services, a transaction can only be considered valid if it generates an economic or commercial benefit for the recipient entity.
In this context, a key question arises in Transfer Pricing analysis:
- Would an independent company be willing to pay for that service under comparable conditions?
If the answer is no, the tax authority could question the deductibility of the expense and reject the intra-group charge.
Therefore, the existence of contracts or invoices is no longer sufficient to support this type of transaction. Companies must demonstrate that the service:
- was actually provided,
- generated economic value,
- and met a real business need.
Increased Scrutiny of Intra-Group Services
Tax authorities have intensified their review of these types of transactions due to the risk of tax base erosion and artificial profit shifting within multinational groups.
In various audit processes, the analysis typically focuses on three main elements:
- The actual provision of the service
- The economic benefit obtained
- The reasonableness of the fee charged
Consequently, companies must have robust evidence to substantiate:
- reports,
- emails,
- deliverables,
- analyses,
- contracts,
- and results associated with the service provided.
A lack of sufficient supporting documentation may result in:
- tax adjustments,
- denial of deductions,
- tax penalties,
- and international disputes.
Shareholder activities and duplication of services
One of the main challenges in Transfer Pricing is identifying which costs actually correspond to intra-group services and which should be borne directly by the parent company.
The OECD guidelines exclude so-called “shareholder activities” from the basis of intra-group charges, that is, those carried out exclusively in the interest of the parent company, such as:
- shareholder meetings,
- share issuance,
- financial consolidation,
- or corporate compliance for the group.
Likewise, tax authorities often question situations involving duplicate services, where the subsidiary already performs the same function internally or contracts it out to independent third parties.
In both cases, the deductibility of the expense may be compromised.
Economic substance and supporting documentation
The international trend shows a shift from a purely formal review toward an approach based on economic substance.
This implies that taxpayers must strengthen not only their Transfer Pricing documentation but also the operational and economic traceability of each intra-group service.
Additionally, the OECD guidelines provide for simplified treatments for low-value-added intra-group services, allowing for the application of cost allocation mechanisms with standardized margins, provided certain technical requirements are met.
Multinational companies must ensure that their intra-group transactions reflect genuine value creation and are supported by sufficient technical, economic, and documentary evidence to justify their deductibility under the arm’s length principle.
At TPC Group, we have Transfer Pricing specialists ready to assist companies with tax risk assessment, technical documentation, and compliance with international standards aligned with OECD guidelines.
Sources: OECD