Navigating Intra-Group Services in Corporate Tax

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Introduction

Ensuring compliance with the arm's length principle (ALP) for intra-group services (IGS) is a crucial aspect of transfer pricing (TP). UAE's Federal Tax Authority (FTA) has issued a comprehensive guide to shed light on the intricacies of TP considerations for IGS for MNEs to refine their tax strategies. Let’s understand these.

Determining whether IGS has been rendered

All IGS are not chargeable under TP. The guide enumerates how to examine whether IGS are chargeable or not.

1. The benefits test involves assessing whether an activity provides economic or commercial value to enhance or maintain the recipient's business position. Key factors include determining if benefits have economic value, evaluating the commercial necessity of the activities, and ensuring that benefits are identifiable and quantifiable.

2. Shareholder activities are not considered IGS and should not be charged to other group members. Examples include costs related to the parent entity's juridical structure (issuing of shares in the parent entity, stock exchange listing of the parent entity), global reporting, fundraising, and compliance with tax laws.

3. Often, a group company arranges and pays for goods or services on behalf of related parties (example, procurement of raw materials, supplies from a common vendors). A question arises whether a profit element should be added when recharging such costs to related parties, especially where there is a duplication of services imperative due to the market scenario. The group service provider can pass through costs to related parties without a profit markup if the goods or services are requested for their benefit, and the provider acts as a mere paying agent. However, it is advisable to charge an arm's length standard margin based on the costs incurred and the value-add for fairness in intra-group transactions. It is pertinent to note that reimbursement of costs for IGS is one of the most litigated issues in TP globally.

4. Centralized Services within a MNE group include various activities such as planning, IT services, human resources, financial advice, legal services, customer services, and support functions. They are considered as IGS and the obligation to pay arises when the benefits test is satisfied, whether or not there is an explicit agreement. Not all centralized services may be chargeable to group entities, for instance, the entity conducting the special audit for its own regulatory compliance should bear its own cost.

Documentation

To ensure compliance and transparency, MNEs are advised to maintain records explaining IGS, beneficiary identification, benefit summaries, chosen TP methods, and justifications for allocation keys. TP documentation serves as a crucial resource in the event of regulatory inquiries. The onus of maintaining adequate TP documentation rests with the taxpayer. The taxpayer must determine its TP documentation policies in consultation with TP experts.

Conclusion

The guide offers MNEs a comprehensive toolkit for navigating the complex terrain of IGS in UAE corporate tax. Yet, considering that TP regulations in the UAE are at a nascent stage, it may be worthwhile for taxpayers / advisors to take a cue from tax advanced countries while arriving at their TP positions.

Disclaimer : The content on this website is provided for general informational purposes only. It is not intended as professional advice and should not be construed as such. The information is based on the knowledge and experience available at the time of writing and is subject to change.