Special Considerations for Intra-Group Services

June 2018

The BMG has submitted comments to the OECD on its public consultation on Revision of Chapter VII of the OECD Transfer Pricing Guidelines on Special Considerations for Intra-Group Services.


Although the issue under consideration here seems a simple one, it raises problems which demonstrate the failure of the continuing adherence by many OECD members to a rigid interpretation of the arm’s length principle (ALP). The OECD set out on this wrong path in 1995 with the adoption of the Transfer Pricing Guidelines (TPGs). They resulted from conflicts among OECD members due to the US adoption of the comparable profits method. 

Rules on transfer pricing concern the allocation of profits of MNEs. This central aim was obscured when the 1995 TPGs became focused on the pricing of transactions. The mandate from the G20 for the BEPS project was to reform the rules to ensure that profits of multinational enterprises (MNEs) could be taxed ‘where economic activities occur and value is created’. By failing to address this issue directly in the actions on transfer pricing, the OECD has clearly failed to meet this objective. This seems due to the continued reluctance among many specialists on transfer pricing to accept the need to agree objective criteria for apportionment of profit. This need is even more urgent in today’s digital world, where attempting to decide an appropriate allocation of profit by focusing on the pricing of transactions is simply fruitless.

This present consultation concerns attribution of costs, not profits. An integrated MNE by its nature engages in many activities which benefit the whole group, and hence entail joint or overhead costs. Yet it is clearly inconsistent to seek to adopt an approach which would apportion costs while profits continue to be attributed by transactional methods. This is especially so when the method used is a one-sided one (cost-plus, resale-minus, and the TNMM, which is the most commonly used). Since these methods attribute profits by reference to those of comparable independent enterprises, it is simply inappropriate to allow a further deduction of central service costs.

Indeed, this fundamental point applies more widely. The adoption of the transactional approach andfunctional analysis in the 1995 TPGs required all joint production functions to be treated not as costs to be charged, but as separate transfer transactions to be priced. This includes the main profit drivers of an MNE: capital, research and development (R&D), and risk-taking. MNEs exert centralised control over all these activities, and they benefit (or harm) the firm as a whole. Also, they entail largely non-physical activities, responsibility for which can easily be attributed to an entity located anywhere. This is recognised as the main source of BEPS. It cannot be adequately tackled while there is a continuing insistence on basing transfer pricing on functional analysis, treating all affiliates of a MNE as independent entities transacting with each other at arm’s length. The continued insistence on functional analysis has meant that the BEPS project outcomes have made the TPGs far more complex and obscure.

Hence, we do not agree with the premise in the request for comments that the concern is only about the practical application of the guidance in chapter VII, and not the theoretical basis. Unless and until Working Party 6 faces up to the fundamental difficulties of the current interpretation of the ALP, none of the problems of transfer pricing will be resolved. This will no doubt be covered up by further revisions to the TPGs, using language which may be approved by consensus, but conceals continuing differences. This particularly disadvantages smaller countries which lack the resources to develop convincing technical arguments to justify a preferred interpretation. It also leaves smaller and middle-sized MNEs that might not have the resources to invest in comprehensive functional analyses at increased risk. Overall, however, no-one (save the army of transfer pricing consultants) gains from the ad hoc and subjective rules resulting from the transactional approach to the TPGs, which foment confusion and conflict.

Tax advisers are as much to blame for this as the government representatives on WP 6. While business pleads for simpler rules to provide certainty, a large majority of tax advisers continue to defend fundamentalist interpretations of the ALP, which lead to increasingly confused and complex elaborations of the TPGs.