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Understanding transfer pricing: Intra-group services and Cost Contribution Arrangements (CCA) explained

June 5, 2024
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Transfer pricing is the process of setting the prices of transactions between related parties. Transfer pricing affects the allocation of profits and taxes among different jurisdictions where the Group of multinational companies (MNE) operates. Therefore, transfer pricing rules and methods are subject to the scrutiny of tax authorities.

One of the key challenges in transfer pricing is to determine the arm’s length price, which is the price that would have been agreed by independent parties in comparable circumstances. The arm’s length principle is the basis for most transfer pricing regulations and standards around the world. However, applying the arm’s length principle is not always straightforward, especially when the transactions are more complicated.

In this article, we have focused on the topic of assessing the services that are provided between related companies. Seemingly, a simple topic at first, but it has its own specifics. In practice, the concepts of intra-group service are often confused with sharing the costs of carrying out activities.

We also compare two approaches that can be used to address some of the difficulties in applying the arm’s length principle: intra-group services and cost contribution arrangements (CCA). We will explain the main features of low-value-added services and shareholder activities.

Intra-group services

An intra-group service is a service provided by one or more members of a group to another member of the same group, such as management, accounting, legal, IT or human resources services. The service provider should charge the recipient a fee that reflects the market price of the service. Most often, this fee is determined by a profit mark-up that is added to the costs attributable to that service (directly or indirectly through an allocation key).

The main advantage of intra-group services is that they can increase the efficiency and competitiveness of
a MNE group.  Intra-group services can also improve the quality and consistency of services across the group and reduce duplication and fragmentation of functions and resources. Intra-group services can also enable the MNE group to adapt to changing market conditions and customer needs and to meet regulatory and legal requirements.

The following definitions should be considered when assessing intra-group services:

  • Shareholder activities
  • Services with low added value

Shareholder activities

In transfer pricing, there are situations where a related company carries out activities that apply to other group members even though those members do not need it (and would not be willing to pay for it if they were independent companies). This would be the case, for example, where an activity is carried out by a group member (usually a parent company or a regional holding company) solely because of its shareholding, i.e. in its position as a shareholder. This type of activity is not considered an intra-group service. These are so-called ‘shareholder activities’.

The most common costs are:

Costs relating to the legal structure of the parent company itself, such as general meetings of the parent company’s shareholders, the issue of the parent company’s shares, the listing of the parent company on the stock exchange and the cost of the supervisory board;

Costs relating to the reporting requirements (including financial statements and audits) of the parent company, including the consolidation of reports, the cost of the parent company’s audit of the subsidiary’s accounts carried out by the parent company solely in the interest of that parent company and the costs associated with the preparation of the consolidated financial statements of the multinational company;

Costs of raising funds for the acquisition of treasury shares and the parent company’s investor relations costs, such as the parent company’s communication strategy with shareholders, costs associated with financial analysts, funds and other stakeholders in the parent company;

Costs associated with the parent company’s compliance with tax laws;

Ancillary costs associated with the corporate governance of the Group as a whole.

Services with low added value

Intra-group services are services provided by one member of a MNE group to another member of the same group. Intra-group services with low added value are those that do not contribute significantly to the generation of income or profits of the group, and that are of a supportive nature. Some examples of intra-group services with low added value are routine back-office functions, payroll processing, data entry, and travel arrangements. Intra-group services with low added value are relevant for transfer pricing because they may give rise to cross-border payments between related parties, which need to be priced in accordance with the arm’s length principle.

There are different methods and approaches to pricing intra-group services depending on the nature, complexity and value of the services. However, for intra group services with low added value, the OECD Transfer Pricing Guidelines provide a simplified approach.

This simplified approach allows the service provider to charge the recipient of the service a mark-up in the recommended range of 3% to 10%, most commonly 5%, on top of the costs incurred in providing the service, without the need to carry out a detailed comparability analysis or to compare the mark-up with arm’s length transactions. The aim of this method is to reduce the compliance burden and the risk of disputes for both taxpayers and tax authorities, while ensuring a reasonable allocation of income and expenses among the group of multinational companies.

Cost Contribution Arrangement

A Cost Contribution Arrangement (CCA) is an agreement between two or more related companies to share the costs and risks associated with the development, production or acquisition of certain assets, services, or rights in proportion to their expected benefits.

It is a contractual arrangement that governs the rights and obligations of the parties. The main advantage of a CCA is that it allows the participants to align their transfer pricing outcomes with their value creation, by ensuring that each participant pays or receives a fair share of the costs and benefits of the joint activity. A CCA can also reduce the complexity and uncertainty of determining the arm’s length price.

If related companies are involved in the performance of services whose main objective is to achieve a common benefit within the group (most often in the form of cost savings), we are not talking about an intra-group service, but about cost sharing. In such a transaction, no profit mark-up is added to the costs. When CCAs are applied to services, the determination of the transfer price consists in taking into account the relative shares of the participants in the expected benefits on the basis of an appropriate allocation key. Allocation keys may be based on sales (turnover), profits, quantity of units used, produced or sold, number of employees, etc.

Comparison of intra-group services and Cost Contribution Arrangements

Approach Advantages Disadvantages
Intra-group services
  • Enhances efficiency and competitiveness of MNE group
  • Improves quality and consistency of services across group
  • Reduces duplication and fragmentation of functions and resources
  • Enables adaptation to changing market conditions and customer needs
  • Complies with regulatory and legal requirements
  • Difficult and costly to identify, measure, and price
  • Requires adequate documentation and evidence
  • Raises tax issues and disputes
  • May not have comparable transactions or benchmarks in open market
  • Aligns transfer pricing outcomes with value creation
  • Reduces complexity and uncertainty of pricing assets, services, or rights
  • Facilitates coordination and cooperation among participants
  • Fosters innovation and efficiency
  • Requires high level of documentation and analysis
  • Requires agreement and monitoring of joint activity
  • Entails significant compliance costs and risks
  • May be subject to different interpretations and regulations by tax authorities

If you suppose that your company may be subject to the obligation to process transfer pricing documentation, involving service transactions and you would like to obtain additional information on intra-group services and Cost Contribution Arrangements, our experts will be happy to advise you.

Zdenka Karak
Senior Transfer Pricing Specialist | Accace Slovakia
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