{"id":939,"date":"2015-02-05T11:46:07","date_gmt":"2015-02-05T11:46:07","guid":{"rendered":"http:\/\/www.goodmanjones.com\/blog\/?p=939"},"modified":"2022-03-14T14:26:28","modified_gmt":"2022-03-14T14:26:28","slug":"part-of-an-international-group-better-watch-those-cross-charges","status":"publish","type":"post","link":"https:\/\/www.goodmanjones.com\/blog\/part-of-an-international-group-better-watch-those-cross-charges\/","title":{"rendered":"Part of an international group? \u2013 better watch those cross-charges!"},"content":{"rendered":"

\"\"<\/p>\n

Ever since the financial crash, there\u2019s been increasing pressure on international groups whose tax bills seem too low.\u00a0 The word \u201cmorality\u201d has regularly fallen from the splenetic lips of outraged politicians, furious that the tax structures their colleagues have created have been used in a way they\u2019d claim was never intended. Behind the scenes the OECD<\/a> has been looking at ways to limit the extent to which profits can be shifted from one territory to another without in any way prejudicing the right of sovereign governments to entice business to their territories by way of tax incentives.\u00a0 It\u2019s a hard task, but a start has been made with BEPS Action 10.<\/p>\n

BEPS Action 10<\/h2>\n

An OECD discussion document succinctly titled \u201cBEPS Action 10: PROPOSED MODIFICATIONS TO CHAPTER VII OF THE TRANSFER PRICING GUIDELINES RELATING TO LOW VALUE-ADDING INTRA-GROUP SERVICES\u201d<\/a> has just been issued.\u00a0 Its 20 pages seek to define low value-adding intra-group services, how they should be documented, and the appropriate margins. Furthermore, it defines what is described as \u201cshareholder activities\u201d which shouldn\u2019t be cross-charged in the first place.<\/p>\n

This document raises some interesting points.\u00a0 Its description of Shareholder Activities includes the phrase \u201can intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises)\u201d.\u00a0 It goes on to say \u201cThis type of activity would not be considered to be an intra-group service, and thus would not justify a charge to the recipient companies\u201d.\u00a0 It lists examples, which include \u201ccosts relating to reporting requirements (including financial reporting and audit) of the parent company \u2026 and costs relating to the preparation of consolidated financial statements of the MNE (however, in practice costs incurred locally by the subsidiaries may not need to be passed on to the parent \u2026 where it is disproportionately onerous to identify and isolate those costs)\u201d<\/p>\n

Whilst the logic behind the first phrase is undoubtedly sound, the second one rings alarm bells.\u00a0 A quoted parent company will typically have quarterly reporting requirements that oblige its subsidiaries to undertake work and be subjected to quarterly review by their auditors.\u00a0 Those auditors will bill their client \u2013 the subsidiary \u2013 for their efforts.\u00a0 Those bills are readily identifiable.\u00a0 The auditor\u2019s client would most certainly, were it independent, be unwilling to pay the charge as it arguably receives no benefit from the service performed.\u00a0 I have never seen such charges recharged to the parent, nor have I seen them disallowed in computations of taxable profits.\u00a0 Yet the implication of the bracketed comment is that these will no longer be allowable expenses of the trade of the subsidiary.<\/p>\n

Duplicate Services & Incidental Benefits<\/h2>\n

The document then discusses duplicate services (if genuinely a duplication of what the group member has already done, no cross-charge), and incidental benefits (where benefits flow to a group member as a by-product of services targeted at another group member or members, again no cross-charge) \u00a0The latter includes not only the benefit of enhanced credit-worthiness resulting merely from being a member of a substantial group, but also the boost to its trade from group reputation-building achieved by global marketing\u00a0 and PR campaigns.- the implication being that the parent should bear all the costs of brand promotion whilst the beneficiaries (its various subsidiaries) bear none. That seems more than a little draconian.<\/p>\n

Centralised Services & “On call” Charges<\/h2>\n

The document also discusses centralised services and\u00a0 \u201con call\u201d charges, prohibiting neither, but saying the fact of payment being made or liability recorded for intra-group service provision does not provide evidence that such service has been supplied, any more than their absence\u00a0 is evidence that no such service has been supplied. This would seem to imply that if proof of supply existed even where no cross-charge had been rendered, a tax deduction might still be possible \u2013 more likely, however, is the alternative implication that where a supply can be seen to have been made but no charge rendered, the supplier should be deemed for tax purposes to have some level of undisclosed income.<\/p>\n

The document then discusses pricing \u2013 no surprises there, equivalent arm\u2019s-length is best, but in many cases can\u2019t readily be achieved.\u00a0 The result is indirect-charge methods.<\/p>\n

Low value-added Intra-group Services<\/h2>\n

The real meat of the document relates to its suggested simplified technique for MNE\u2019s to quantify and allocate low value-added intra-group services.\u00a0 The simplified technique should be applied on a consistent group-wide basis across all countries in which the MNE operates.\u00a0 It summarises low value-added services as being supportive in nature, non-core activities, not utilising unique and valuable intangibles, and relatively low-risk.\u00a0\u00a0 By topic, it suggests these will include:<\/p>\n