Services A member of a controlled group must receive an arm's length charge for performing marketing, managerial, administrative, technical or other services for the benefit of another member of the group. In our hypothetical, CanCo provides collection services to USSub and should receive an arm's length charge for those services. The arm's length charge for the performance of services is generally the cost incurred regarding the services. These costs are both direct and indirect costs. Direct costs constitute the compensation paid and travel expenses of employees performing the services, material supplies consumed, telecommunications expenses, and similar items.
Indirect costs constitute an allocation of a broad range of overhead expenses.
If the services are an integral part of the business activity of either the renderer or recipient of the services, the renderer should charge a mark-up. Whether the services are integral is a facts and circumstances test. Because the transfer pricing regulations for services do not specify a method for determining an arm's length mark-up, presumably any method meeting the reliability and comparability requirements of the best method rule should be sufficient. The documentation must state the reasons for believing the prices are at arm's length and must be in place when the return is filed, but does not have to be provided to the IRS until requested on audit. More specifically, the documentation must provide a business description, a thorough analysis of the intercompany transactions, a detailed functional analysis of the relevant parties, a review of the transfer pricing methods resulting in the method chosen, and an economic analysis showing the arm's length nature of the transfer pricing.