Management charges

Decoding Intra-group services

MNEs around the world endeavour to achieve economies of scale by centralising certain activities among the Group (i.e., IT, legal, payroll, back office, marketing, R&D, etc.,). Considering the very terminology of intra-group services (IGS), it becomes an easy target for tax authorities to impose transferpricing adjustments. As benefit received from IGS are often auxiliary, taxpayers are encountered with satisfying ‘Need-benefit test’.

More often than not, focus is more on mark-up charged on IGS, leaving behind big picture i.e., cost base/cost pool. Determining accurate cost base is essential to arrive at an arm’s length cross-charge, and accordingly, directly identifiable costs, pass through costs, etc., ought to be identified for cost pool. Selection of reasonable allocation keys for indirect costs allocation is another key point. IGS cross charge is arrived at by adding an arm’s length mark-up to such costs. For defending such mark-up, countries who have adopted OECD TPG such as EU, UAE may resort to mark-up of 5% on LVS (Low Value adding services) while others may undertake independent benchmarking using Global databases from a service provider perspective.

Having said that, not all IGS warrant a compensation i.e., shareholder activities, duplicative services, incidental benefits, etc., One may need to evaluate nature of services before categorizing them as chargeable IGS.
In spite of offering varied services to the benefit of affiliates, taxpayers customarily term them as “ Managementcharges ”, without emphasising the technicality of services, which might mislead tax authorities to categorise them as LVS. Instead, one may look at adopting apt nomenclature, e.g production support, technical support, marketing support etc., thereby demarcating from LVS.

Since IGS attracts tax authority’s attention, one may make note of the following:

• Clear identification of category of services (Technical or LVS) to be done.
• Data justifying ‘Rendition test, ‘Need-benefit’ test to be sourced on a contemporaneous basis to handle litigation seamlessly.
• Consistency in Group policy to be evaluated– eg., Regulatory requirements in few countries like China may restrict IGS charge resulting in disparity.
• IGS < INR 10 cr. – Indian taxpayers may resort to Safe harbour rules to ring-fence it from tax litigation where certificate of cost pool workings is required.
• IGS > INR 10 cr.- May opt normal litigation / APA – Critical to note, there is a dual requirement in APA– a) cost plus which is agreed and b) cap on overall quantum i.e., as a % on sales.
• Can opt for MAP, in case of TP adjustment. Relief may be provided based on factual pattern.

Depending on the factual circumstances, one may take a calculated call in determining the approach to be adopted.