In March 2018, Ireland’s Inland Revenue released Guidelines on Low Value Intra-Group Services. The objective of the Guidelines is to provide a simplified approach to valuing certain intra-group services within a multinational enterprise (“MNE”) when specified conditions are met. The Guidelines allow for a mark-up on 5% on the costs of providing intra-group services to other MNE members, without need for a benchmarking study to support the charge, when:
- the cost basis is the most appropriate methodology to employ when pricing services;
- the services are administrative or routine in nature (i.e. back office type of support services);
- the services are not part of the MNE’s core business;
- valuable, non-routine intangibles are not being used or exploited in the provision of these services;
- the service provider is not assuming significant risk in carrying out its duties.
The Guidelines also reiterate key ideas expressed in the OECD Guidelines. Specifically:
- Analyzing intra-group services should involve a two-pronged approach. First, one must determine if intragroup services have been rendered (or more consistent with the OECD Guidelines, whether a benefit has been conferred from the service provider to another MNE member), and second, ascertain how such services would be priced using arm’s length principles.
- Shareholder costs (such as the regulatory compliance costs of filing public documents) and duplicative costs (the same services are performed by both members of the MNE) should be excluded from any charges.
- Services should be charged using the direct method, where possible, and the indirect method, which employs allocations, otherwise.
- Allocation keys should be consistent with what arm’s length parties would “be prepared to accept”.
Further details are provided on what is considered acceptable documentation.
The Guidelines are noteworthy in that it is mostly consistent with EU guidelines on low value services published in 2010 that specified a mark-up of 3-10% could be applied on qualified activities. It contrasts with the US Services Cost Method (“SCM”) approach which specifies that low-value services (outlined in detailed in Revenue Procedure 2007-13) can be charged out at cost (i.e., no mark-up need be applied).
Caution is warranted for Canadian tax payers with either inbound or outbound intra-group service charges. The Canada Revenue Agency, to date, has never issued any form of safe harbour with respect mark-ups on services, requiring each situation to be assessed separately based on the functions performed and risks assumed by the service provider. The CRA has also shown a penchant at the audit level to challenge inbound services with mark-ups applied, so extra work may be required to demonstrate that the services received from related parties justifies a profit-element.