COMMUNICATION DE LA COMMISSION AU PARLEMENT EUROPÉEN, AU CONSEIL ET AU COMITÉ ÉCONOMIQUE ET SOCIAL EUROPÉEN concernant les travaux menés par le forum conjoint de l’UE sur les prix de transfert entre avril 2009 et juin 2010 et les propositions connexes 1. Lignes directrices relatives aux services intragroupe à faible valeur ajoutée et 2. Approches potentielles applicables aux cas triangulaires non-UE
Date: 2011-01-25
Institutions: European Commission
Subjects: EU body, double taxation, fiscal policy, tax authorities, tax system, third country, transfer pricing

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EUROPEAN COMMISSION 

Brussels, 25.1.2011 
COM(2011) 16 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE  

on the work of the EU Joint Transfer Pricing Forum in the period April 2009 to 
June 2010 and related proposals 1. Guidelines on low value adding intra-group services 
and 2. Potential approaches to non-EU triangular cases 

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE  

on the work of the EU Joint Transfer Pricing Forum in the period April 2009 to 
June 2010 and related proposals 1. Guidelines on low value adding intra-group services 
and 2. Potential approaches to non-EU triangular cases 

1. 

INTRODUCTION 

It is commonly accepted that increased globalization gives rise to practical problems 
for  both  multinational  enterprises  (MNEs)  and  tax  administrations  (TA)  when 
pricing,  for  tax  purposes,  cross-border  transactions  between  associated  enterprises. 
The approach adopted by European Union (EU) Member States to correctly evaluate 
the price of such transactions is that based on the arm's length principle (ALP)1.The 
arm's  length  principle  is  based  on  a  comparison  between  the  conditions  applied  by 
associated  enterprises  and  the  conditions  that  would  have  applied  between 
independent enterprises. 

However,  the  interpretation  and  application  of  the  arm's  length  principle  does  vary 
between  both  tax  administrations  and  tax  administrations  and  business.  This  can 
result  in  uncertainty,  increased  costs  and  potential  double  taxation  or  even  non-
taxation. These impact negatively on the smooth functioning of the internal market. 

To address this, the EU Joint Transfer Pricing Forum (JTPF), an expert group, was 
set up by the Commission in October 20022, to find pragmatic solutions to problems 
arising from the application of the arm’s length principle, in particular within the EU.  

This  Communication  reports  on  the  work  of  the  JTPF  for  the  period  April  2009  to 
June 2010 and draws conclusions on the future work of the expert group. 

2. 

SUMMARY OF ACTIVITIES OF THE EU JOINT TRANSFER PRICING FORUM  

In  the  period  April  2009  to  June  2010,  the  JTPF  met  four  times.  Discussions  were 
concluded  on  two  subjects.  One  is  associated  with  intra-group  transactions  and  the 
other deals with double tax dispute resolutions when a non-EU associate enterprise is 
involved in a transaction (non-EU triangular cases). Reports were produced on each 
of  these  subjects.  Monitoring  exercises  to  gauge  the  level  of  implementation  of 
previous  JTPF  initiatives  were  also  completed.  Discussions  commenced  in  the 
period, but not yet concluded, cover matters related to small and medium enterprises 

1 

2 

The  arm's  length  principle  is  in  Article  9  of  the  Organisation  for  Economic  Co-operation  and 
Development (OECD) Model Tax Convention. OECD also developed Transfer Pricing Guidelines for 
Multinational Enterprises and Tax Administrations. 
Communication from the Commission to the Council, the European Parliament and the Economic and 
Social  Committee:  ‘Towards  an  internal  market  without  obstacles  —  A  strategy  for  providing 
companies with a consolidated corporate tax base for their EU-wide activities’ COM(2001) 582 final, 
23.10.2001. p. 21. 

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and  a  particular  intra-group  arrangement  known  as  cost  contribution  arrangement. 
The JTPF has also started to consider its future work programme. 

2.1. 

JTPF conclusions on low value adding intra-group services  

A particular feature of increased globalisation of MNEs is the growth of a wide range 
of  intra-group  services.  As  this  type  of  service  increased  so  did  the  compliance 
resources  required  to  ensure  adherence  to  the  arm's  length  principle.  It  was  also 
becoming apparent that the incidence of double taxation relating to such services was 
increasing. 

In  particular  the  evaluation  of  a  specific  category  of  intra-group  services, 
subsequently classified as "low value adding intra-group services", against the ALP 
was highlighted as causing problems. The core of the problem lays in the potential 
for excessive resources to be devoted to documenting and auditing these low-value 
services and a gap in the existing guidelines dealing with this type of services. The 
objective was hence the search for more efficiency. The JTPF report in Appendix I 
takes  a  twin-track  approach.  Firstly,  by  setting  in  context  the  breadth  and  depth  of 
any  evaluation  that  might  be  needed  for  a  certain  category  of  intra-group  services. 
Secondly,  the  report  gives  more  specific  guidance  on  how  an  evaluation  may  be 
conducted. The combined approach results in a set of guidelines on low value adding 
intra-group services.  

Given the wide range of intra-group services, the report gives some parameters to the 
type of services that would benefit from the approach suggested in the report.  

The  report  outlines  certain  underpinning  principles.  For  example:  all  relevant  costs 
are  deductible,  subject  to  domestic  law  provisions;  good  quality  and  relevant 
information should be made available and a flexible approach should be taken in the 
review of low value adding intra-group services.  

The report then explores in more detail how those principles should be applied and 
provides guidance on matters that commonly cause difficulty. Examples of the latter 
are analysing a cost pool; defining shareholder costs and evaluating an arm's length 
charge and documentation.  

An evaluation carried out in accordance with the guidelines could also be useful in 
other  related  areas.  For  example,  resolution  of  double  tax  disputes  or  considering 
penalties related to transfer pricing documentation.  

The report concludes that the guidelines proposed will better facilitate the evaluation 
of  certain  intra-group  services.  It  was  noted  that  some  elements  proposed  may 
equally be applied to the evaluation of other categories of services. Finally, the need 
to  monitor  the  effects  of  the  implementation  of  the  guidelines,  should  they  be 
supported by MS, was identified as an important future action for the JTPF. 

2.2. 

JTPF conclusions on non-EU triangular cases  

Triangular  cases  involve  a  transfer  pricing  transaction  between  two  Member  State 
associated  enterprises  which  is  particularly  difficult  to  resolve  because  another 
associated  enterprise,  in  a  third  state,  had  a  significant  influence  that  resulted  in  a 
pricing outcome not in line with the ALP.  

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Two particular types of triangular cases can be distinguished. Those that involve only 
associated  enterprises  situated  in  Member  States  and  those  which  involve  an 
associated  enterprise  situated  outside  the  EU.  A  report  on  the  former  has  already 
been completed by the JTPF and was incorporated into the revised Code of Conduct 
for the effective implementation of the Arbitration Convention3. The JTPF report in 
Appendix  II  focuses  on  the  latter  type  of  triangular  cases  known  as  non-EU 
triangular cases.  

In the first instance the report gives a useful definition of types of triangular cases. 
The report then goes on to explore and propose some potential approaches that could 
be helpful in double tax dispute resolution. 

The range of potential approaches encompass: improvements to and extension of the 
tax treaty network; rolling back the results of an advanced pricing agreement and a 
flexible application of certain procedures linked to the mutual agreement procedure.  

The  completion  of  the  report  is  significant  for  two  reasons.  Firstly,  it  provides 
pragmatic  suggestions  to  deal  with  the  issue  as  it  currently  stands.  Secondly,  by 
providing a sound basis on which to structure any further debate on the subject in the 
light of future experience. 

2.3.  Monitoring activity 

An ongoing task of the JTPF is to monitor and manage the effective implementation 
of its reports. 

A  review  of  the  statistical  report  of  cases  open  under  the  Arbitration  Convention 
process  revealed  that  there  are  still  numerous  outstanding  cases.  A  greater  level  of 
detail to better identify the reasons for delay would be beneficial and as a result the 
format of the report is being reviewed.  

A  specific  review  was  made  to  measure  the  impact  of  the  implementation  of  the 
Code of Conduct on transfer pricing documentation for associated enterprises in the 
European  Union  (EUTPD).  The  JTPF  reported  that  the  adoption  of  the  code  is 
recognised as a standard or reference point. This is the case even where MNEs do not 
officially opt into the code, it being a voluntary code for them.  

Suggested  improvements  to  the  code  included  the  use  of  a  common  language  in 
preparing  reports  and  greater  acceptance  of  pan-European  comparables  in  pricing 
evaluation.  

The  overarching  conclusion,  however,  was  that  the  code  needed  more  time  to  be 
established before being reviewed. There was a time lag between the adoption of the 
code  in  2006,  and  its  impact  on  audits.  The  JTPF  resolved  to  consider  the  matter 
again after two or three years, when a second monitoring exercise would be done. 

3 

Communication  from  the  Commission  to  the  Council,  the  European  Parliament  and  the  European 
Economic  and  Social  Committee  on  the  work  of  the  EU  Joint  Transfer  Pricing  Forum  in  the  period 
March  2007  to  March  2009  and  a  related  proposal  for  a  revised  Code  of  Conduct  for  the  effective 
implementation of the Arbitration Convention (90/436/eec of 23 July 1990 COM(2009) 472 final, p. 7 
and 10. 

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2.4. 

Update on current and future work programme 

The work programme that forms the basis of the current JTPF mandate was approved 
in September 2007. Five subjects were agreed to be examined. The first, monitoring, 
is an ongoing item. Two completed reports, one on improvements to the Arbitration 
Convention  and  the  other  on  intra-group  services,  dealt  with  the  second  and  third 
programme items. Work on the fourth and fifth items, small and medium enterprises 
and  cost  contribution  arrangements,  has  recently  started  and  is  expected  to  be 
completed in 2011. 

In  addition  to  the  approved  programme  items,  two  reserve  items  were  recorded: 
alternative dispute resolution and risk assessment. The Commission Communication 
for  the  effective  implementation  of  the  Arbitration  Convention4  noted  that  further 
discussion  was  needed  on  two  matters:  setting  up  an  independent  permanent 
secretariat  for  the  operation  of  the  Arbitration  Convention,  and  the  interaction 
between  the  Arbitration  Convention  and  Article  25.5  of  the  OECD  Model  Tax 
Convention (MTC). These remain to be considered in the future. 

The JTPF has already identified three other issues that may be considered for future 
work  items.  They  are:  the  impact  of  the recent  revisions  to  Article  7  of  the  OECD 
MTC, compensating adjustments and secondary adjustments. 

Finally,  the  Commission  carried  out  a  public  consultation  on  "Double  tax 
Conventions  and the  internal  market: factual examples  of double  taxation cases" in 
May and June 2010. An initial review of the responses suggests that transfer pricing 
issues  remain  a  prominent  feature  of  double  tax  concerns.  The  responses  will  be 
analysed  further  and  there  may  be  a  role  for  the  JTPF  in  addressing  the  concerns 
raised. 

3. 

COMMISSION CONCLUSIONS 

The Commission continues to regard the JTPF expert group as a valuable resource in 
addressing  transfer  pricing  issues  and  providing  pragmatic  solutions  to  a  variety  of 
transfer pricing issues.  

In particular the Commission notes that the  report on low value adding intra-group 
services directly addresses a key task identified by the Commission when setting up 
the  JTPF  namely  to  achieve  a  more  uniform  application  of  transfer  pricing  rules 
within the European Union.  

The Commission fully supports the conclusions and suggestions of the JTPF on low 
value  adding  intra-group  services  in  the  attached  Guidelines.  In  particular  the 
Commission considers that the guidelines are a good road map to a more expedient 
evaluation of the type of services defined.  

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Communication  from  the  Commission  to  the  Council,  the  European  Parliament  and  the  European 
Economic  and  Social  Committee  on  the  work  of  the  EU  Joint  Transfer  Pricing  Forum  in  the  period 
March  2007  to  March  2009  and  a  related  proposal  for  a  revised  Code  of  Conduct  for  the  effective 
implementation of the Arbitration Convention (90/436/eec of 23 July 1990 COM(2009)472 final, p. 9.  

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The Commission invites the Council to endorse the proposed guidelines on low value 
adding  intra-group  services  and  invites  Member  States  to  implement  quickly  the 
recommendations  included  in  the  Guidelines  in  their  national  legislation  or 
administrative rules. 

The Commission also fully supports the conclusions and suggestions of the JTPF on 
non-EU  triangular  cases.  In  this  regard  the  Commission  welcomes  that  the  JTPF 
addressed  and  tracked  the  development  of  these  contemporary  issues.  The 
Commission  is  of  the  opinion  that  the  use,  wherever  possible,  of  the  proposed 
approaches  and  procedural  considerations  in  the  report  will  help  resolving  non-EU 
triangular cases. 

The  Commission  invites  the  Council  to  endorse  the  proposed  report  on  non-EU 
triangular cases and invites the Member States to implement practices that are in line 
with  the  approaches  and  procedural  considerations  contained  in  the  report  in  their 
national legislation or administrative rules. 

Member  States  are  invited  to  report  annually  to  the  Commission  on  any  measures 
they  have  taken  further  to  these  Guidelines  and  their  practical  functioning.  On  the 
basis of these reports, the Commission will periodically review these Guidelines. 

In this context, the Commission notes the conclusions of the monitoring activity and 
looks forward to the outcomes of the JTPF current work programme items on small 
and medium enterprises and cost contribution arrangements. 

The  Commission  also  believes  that  the  mandate  of  the  JTPF  should  be  prolonged 
once the current mandate comes to its end in March 2011. 

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Appendix I 

GUIDELINES ON LOW VALUE ADDING INTRA-GROUP SERVICES 

INTRODUCTION 

Chapter  VII  of  the  Organisation  for  Economic  Co-operation  and  Development 
(OECD)  transfer  pricing  guidelines  for  Multinational  Enterprises  (MNEs)  and  Tax 
Administrations  (OECD  guidelines)  examine  "issues  that  arise  in  determining  for 
transfer pricing purposes whether services have been provided by one member of an 
MNE group to other  members  of  that group and,  if  so,  in  establishing  arm's  length 
pricing for those intra-group services". Broadly, the chapter then goes on to consider 
if a service has been provided and what, for tax purposes, the intra-group charge for 
such a service should be to accord with the arm's length principle. 

The OECD guidelines recognize the wide range of services that may be provided and 
equally  the  wide  range  of  benefit  provided,  or  expected,  by  the  provision  of  such 
services.  The  Joint  Transfer  pricing  Forum  (JTPF)  thought  it  worthwhile  to 
supplement the list of services mentioned in the OECD guidelines. At Annex 1 is a 
list  of  intra-group  services  commonly  provided  that  may  or  may  not  be  within  the 
scope of this paper. 

The  JTPF  identified  certain  issues,  important  to  any  reviewer  (the  term  reviewer 
applies  to  the  reviewer  function  exercised  either  by  the  taxpayer  or  the  tax 
administration), in applying the guidelines as they relate to intra-group services. The 
issues  include:  increasing  globalization  and  related  central  service  provision;  the 
increasing demand on resources; the potential for costs to be "stranded" in that no tax 
administration  would  accept  them;  and  an  awareness  that  some  types  of  service 
provision represented a lower risk than others although that did not seem to have an 
impact in a practical application of the OECD guidelines by reviewers. 

This paper is focused on how best to address those issues. The paper seeks to neither 
restrict the right of a tax administration to conduct an audit nor for an MNE to make 
representations  based  on  the  facts  and  circumstances,  of  their  particular  case  to 
support the inclusion or exclusion of a specific service. Nonetheless it is anticipated 
that fewer full audits will be required into the intra-group services that fall within the 
scope of this paper. 

OVERVIEW 

Underpinning this paper is the assumption that MNEs and tax administrations act in 
good  faith  and  an  unequivocal  endorsement  of  the  OECD  principles  to  be  applied 
when  considering  intra-group  services.  The  emphasis  of  the  paper,  therefore,  is  on 
how most expediently and efficiently a reviewer may conclude that the arm's length 
principle has been applied in the provision of certain intra-group services. 

It is important that the proposals in this paper are applied cumulatively as questions 
that  may  be  relevant  at  the  beginning  of  the  process  may  subsequently  be 
satisfactorily answered after the provision of certain information later in the process. 

I. 

1. 

2. 

3. 

4. 

II. 

5. 

6. 

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For  example,  there  may  be  a  legitimate  concern  about  the  provision  of  a  service 
which is then resolved by information supplied in the narrative. (See section VI.) 

7. 

The key elements or principles of the approach developed by in this paper are: 

(i) All costs are allocable but domestic law will not necessarily allow a full deduction 

of those costs. 

(ii)  Existence  of  certain  important  critical  assumptions  in  establishing  an  agreed 

starting point for any review. 

(iii) The provision of concise and dedicated information to provide an understanding 
of  the  type  of  service  provided  and  the  structure  by  which  those  services  are 
delivered. 

(iv) Flexibility in deciding the breadth and depth of review required in evaluating the 

provision of services against the arm's length standard. 

III. 

SCOPE OF THE PAPER 

8. 

9. 

10. 

11. 

12. 

An  exhaustive  definition  of  the  services  to  which  this  paper  applies  is  neither 
possible nor desirable. This is because of the range of services provided intra-group 
and  the  differing  commercial  impact  that  services  can  have  within  the  context  of  a 
particular  commercial  activity.  Additionally,  any  attempt  to  give  a  definitive 
statement would reduce flexibility in applying the proposals made in this paper. 

It is, however, possible to give some parameters to the type of intra-group services 
targeted by reference to the general nature of the services to be included or excluded 
and the type of structure through which the services are allocated and charged. 

Whilst certain elements of this paper could usefully be applied to the full spectrum of 
intra-group  services  they  are  aimed  more  specifically  at  some  types  of  service 
provision than at others. 

The  services  on  which  the  paper  is  focused  are  the  type  of  services  that 
commentators have variously described as "the glue that holds the corporate structure 
together  to  support  its  main  functions"  or "of  an  administrative  nature,  auxiliary  to 
the  business  of  the  recipient"  and  again  "commonly  available  or  readily  acquired". 
The core nature of the service is that whilst required it is of a routine nature and not 
generating  high  added  value  to  either  the  provider  or  recipient.  The  scope  of  this 
paper  distinguishes  between  services  that  although  low  value  adding  could  still 
generate a high turnover and can be included in this approach and services that are 
high value adding, even if not necessarily generating a high turnover, and would not 
be within the scope of this paper. 

The  paper  does  not  focus  on  direct  charge  services,  the  facts  and  circumstances  of 
which  will,  in  general,  be  self-evident.  Nor  does  the  paper  address  services  that 
intrinsically add high value. What high value adding means is relative to the service, 
the  provider  and  the recipient  It would, however, be exceptional if the approach of 
this  paper  would  satisfy  a  reviewer's  needs  in  considering  services  in  the  nature  of 
innovative research and development, intellectual property, financial transactions or 

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13. 

IV. 

14. 

15. 

16. 

17. 

other  services  that  are  a  significant  commercial  driver.  Similarly,  activity  that 
inherently  relies  on  the  potential  to  attract  a  high  level  of  reward  associated  with 
exposure  to  high  risk  will  not  be  within  the  parameters  envisaged.  Specifically  the 
paper does not address cost contribution arrangements. 

It  is  also  important  to  note  the  distinction  between  straight  forward  charging  and 
delivery  mechanisms  and  more  complex  arrangements.  It  is  not  envisaged  that  a 
single centrally provided low value adding service charged out to several associates 
by means of a readily identifiable allocation key would give cause for concern. This 
paper therefore concentrates on multiple low value adding services that will often be 
provided through a single contract and generally involving a cost pool and allocation 
keys. 

AUDITS AND CENTRALLY PROVIDED INTRA-GROUP SERVICES 

It  is  entirely  reasonable  that  a  reviewer  will  want  confidence  that  any  provision  of 
services  is  in  alignment  with  OECD  principles;  all  appropriate  costs  are  included, 
inappropriate  costs  excluded  and  an  arm's  length  price  applied.  The  level  of 
confidence required and how acquired can be achieved in various ways depending on 
the particular circumstances of the case and a tax administration's overall approach to 
transfer pricing audits. 

In  addressing  those  concerns  this  paper  suggests  alternative  approaches  that  will 
achieve  an  appropriate  level  of  confidence  that  the  arm's  length  principle  has  been 
applied. Equally a balance is sought between available resources, compliance burden 
and potential level of adjustment. 

Clearly a full audit of a particular case will satisfy the needs of any reviewer but the 
approach developed in this paper seeks to arrive at a more expedient way to achieve 
that same end in the vast majority of cases that, within the scope of this paper, are 
commonly encountered. 

At  the  other  end  of  the  spectrum  to  a  full  audit  approach  some  tax  administrations 
have  embarked  on  MNE  relationship  building exercises.  The  desired  outcome  is  to 
better  understand  each  other's  perspectives  and  build  trust.  The  mechanism  to 
achieve that is by means of a non-audit-driven open and ongoing dialogue between 
tax administrations and MNEs. So for example in the context of centrally provided 
intra-group services a tax administration will ask (outside of an audit scenario) for an 
explanation of how the MNE operates its system. The MNE will engage in an open 
dialogue with the tax administration to ensure a full understanding of the framework 
supported  as  necessary  with  contemporaneous  information.  It  is  also  recommended 
that updates take place through regular meetings.  The  outcome  may  be  that  the  tax 
administration  will  consider  particular  facets  of  the  MNE’s  business  as  compliant 
and  therefore  low  risk.  But  if  subsequently  an  audit  is  considered  appropriate  then 
the  areas  of  concern  can  be  better  targeted.  Additionally,  certain  fundamental 
questions (e.g. has a service been provided) may not be tested, other than perhaps by 
affirmation, based on the level of trust and confidence that has been built up in the 
relationship between the tax administration and the MNE. 

18. 

However,  acknowledging  that  the  approach  outlined  above  is  not  yet  widely 
developed across Europe and that a full audit approach will not improve the current 

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situation  the  following  guideline  framework  is  recommended  where  further 
examination of the provision of centrally provided intra-group services is in point. 

V. 

19. 

CRITICAL ASSUMPTIONS 

These are: 

(a) 

(b) 

(c) 

Services concerned are low risk, low value adding business transactions. 

A  service  provided  meets  the  OECD  arm's  length  standard  in  particular  the 
services concerned are rendered and the recipient is provided with economic or 
commercial value. 

An  MNE  will  have  its  own  governance  system  and  audit  procedures  in  place 
and any services provided will be subject to that governance process. 

(d) 

Good quality information will be supplied on demand. 

20. 

It is accepted that some or all of the above critical assumptions may be tested as the 
process continues. 

VI. 

NARRATIVE 

21. 

22. 

23. 

A  reviewer  in  the  light  of  the  facts  and  circumstances  of  a  case,  their  level  of 
experience  and  knowledge  of  the  particular  MNE  concerned  may  take  different 
approaches in requesting what they consider sufficient corroborative information to 
confirm  that  a  service  that  has  been  rendered  complies  with  the  arm's  length 
principle.  In  making  an  informed  decision  access  to  sufficient,  good  quality 
information  is  crucial.  This  paper  proposes  that  the  provision  of  a  narrative  would 
largely meet that information requirement. 

Given the routine nature and low value adding of the services, the narrative should 
give  sufficient confidence to  the reviewer that from the perspective of the provider 
the service has been rendered and from the perspective of the recipient, the service 
provides economic or commercial value and the recipient - if it were independent - 
would  have  paid  for  the  activity  or  else  performed  the  service  itself.  Therefore  the 
question of whether a service has been provided should not be a contentious issue. 

The exact content and extent of a narrative may vary but a comprehensive narrative 
is envisaged as a relatively modest document. It is particularly important to maintain 
a  balance  between  the  level  of  information  requested,  the  low  risk  nature  of  the 
services addressed and the potential compliance burden. As appropriate all or some 
of the following non-exhaustive topics will be covered: 

(a) 

As  part  of  a  sanity  check  exercise  to  put  the  provision  of  services  in  context 
some  indicative  ratios  may  be  requested  (e.g.  costs  incurred  for  intra-group 
services  compared  to  overall  operating  expenses  or  the  level  that  intra-group 
service provision turnover bears to total turnover). Any such ratios will need to 
be interpreted within the context of the associate's nature of trade. 

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(b) 

(c) 

(d) 

(e) 

(f) 

(g) 

Explaining  a  service  provision  within  the  overall  context  of  the  MNE’s 
business  in  order  to  understand  the  rationale  both  for  the  provider  and  the 
recipient.  For  example  economies  of  scale  may  make  it  more  efficient  for  a 
subsidiary to have payroll services or HR services centrally provided. Again, it 
may make more economic sense to have "on demand" access to IT services. 

A  reconciliation  of  the  MNE’s  overarching  transfer  pricing  policy  to  the 
services actually centrally provided. 

An account of the type of services provided and to whom. 

Details of the benefit or expected benefit to the recipients. The benefit derived 
from certain services will be self evident (e.g. payroll). Other services, where 
the  benefit  is  not  so  immediately  apparent,  may  require  further  explanatory 
comment.  For  instance  if  worldwide  promotional  activity  services  are  present 
how does that service benefit an individual subsidiary? 

An explanation of the structure by which services are delivered. There may be 
one  central  service  providing  entity  or  alternatively  different  subsidiaries 
provide specific services intra group. Again a mix of two systems may be used 
and the interaction of those systems will need to be understood. 

A  description  of  the  group  standard  as  it  relates  to  its  audit  approach  and  as 
applied to services. For example defining direct and indirect cost for inclusion 
in the cost pool; safeguards in place to ensure the consistent application of an 
allocation key for a particular service; ensuring services are not duplicated. 

(h) 

A description of how any cost pool is constructed. 

(i) 

(j) 

(k) 

(l) 

A description of the allocation key(s). 

The  arm's  length  justification  of  the  rate  of  mark  up  applied  or  alternatively 
why no mark up is applied. 

A  record  of  how  services  are  accounted  for  to  include  the  invoicing  system, 
settlement dates, payment methods and any budget versus actual adjustments. 

A  description  of  how  any  mergers  or  acquisitions  are  incorporated  into  the 
service provision system. 

(m)  An understanding of how new services are integrated into the system and how 

a service is terminated. 

How on demand services are handled. 

How the service provision system is maintained and updated. 

Documentation that can be provided. 

(n) 

(o) 

(p) 

24. 

The  above  information  may  be  made  available  and  provided  in  a  variety  of  ways. 
Clearly a dedicated written narrative could be provided. Some of the information, if 
appropriate, may be given verbally. It might also be the case that the examination of 
written contracts will provide an insight to the wider context and will provide most 

EN 

11 

   EN 

of the information in any narrative. Each of the approaches or some combination of 
them  is  valid.  The  important  point  is  that  the  outcome  is  an  understanding  of  how 
any service provision system works. 

25. 

After obtaining a narrative the next stage is to consider what, if any, further detailed 
explanation is needed and how that should be provided. 

VII. 

SPECIFIC AREAS 

26. 

The  narrative  will  set  the  scene  and  also  provide  a  level  of  detail.  Some  areas  are 
more important than others in coming to a reasoned decision and further guidance is 
offered: 

VII.1.  Has a service been provided? 

27. 

28. 

29. 

It  is  key  that  the  reviewer  is  satisfied  that  from  the  perspective  of  the  provider  the 
service  has  been  rendered  and  from  the  perspective  of  the  recipient  the  service 
provides economic or commercial value to enhance its commercial position and the 
recipient would have paid for the activity or else performed the service itself. 

It is not always possible to provide incontrovertible evidence that links a particular 
associate to the benefit derived from a particular service. A reasonable interpretation 
should  be  made  of  available  evidence  supported  by  any  MNE  representations.  The 
principle that all costs are allocable should be remembered and therefore if a service 
cost  is  not  felt  to  be  attributable  to  one  particular  associate  it  must  be  allocated  to 
another subject to the respective domestic law which may not allow a full deduction 
of those costs. 

As  mentioned  above  the  degree  of  certainty  a  reviewer  requires  in  accepting  the 
provision  of  a  service  meets  the  arm's  length  standard  will  vary  from  case  to  case. 
Given  the  routine  nature,  commonplace  provision  and  low  value  adding  of  the 
services coupled with a supporting narrative explanation verification of provision of 
the  type  of  service  addressed  by  the  guidelines  in  this  paper  should  not  be  a 
contentious issue. 

VII.2.  Cost pools 

30. 

31. 

An  area  that  commonly  gives  cause  for  concern  is  the  quantitative  and  qualitative 
content of a cost pool. 

Any  reviewer  will  want  a  level  of  confidence,  which  will  vary  depending  on  the 
particular circumstances of the case, that all appropriate costs are within the pool and 
inappropriate  costs  are  excluded.  Before  addressing  the  question  of  mark  up  and 
allocation it is necessary to ensure that shareholder costs and costs relating to direct 
charged services are excluded (i.e. total costs, minus shareholder costs, minus direct 
charge  costs  gives  the  costs  to  be  allocated).  It  is  also  important  to  understand  the 
nature  of  the  costs  remaining  in  the  pool. The  costs  may  be  made  up  of  direct  and 
indirect  costs  as  well  as  any  appropriate  operating  expenses  of  the  enterprise  as  a 
whole (e.g. supervisory, general and administrative) in as far as they have not already 
been accounted for in the cost categories. 

EN 

12 

   EN 

32. 

33. 

34. 

35. 

36. 

This section of the guidelines outlines suggested approaches, with differing levels of 
detail,  to  verify  a  cost  pool.  The  section  then  goes  on  to  consider  in  more  detail 
certain specific aspects involved in verifying a cost pool. 

The approaches are focused on achieving a balance between an appropriate level of 
confidence  and  the  necessary  level  of  detail.  Any  one  of  the  approaches  described 
may be taken in isolation or in combination and of course other approaches may be 
taken that are equally valid in reaching agreement on the make up of a cost pool. 

A reviewer may opt to take a high level assessment of a cost pool by assessing the 
integrity of the accounting and auditing systems. Such an approach demands a good 
understanding of the systems on which the MNE relies to verify the integrity of its 
cost pool. Explanations of the audit criteria, the standard in applying those criteria, 
and  the  rationale  behind  levels  of  mark  ups  and  allocation  keys  applied  will  be 
needed.  This  approach  has  clear  links  with  the  ongoing  MNE  dialogue  envisaged 
above. 

Another reviewer may, in achieving the confidence level they require, opt for some 
additional  selective/random  examination  of  costs.  This  approach  is  an  extension  of 
the first in that an overall comprehension of the procedures in creating the cost pool 
is still required but some further limited enquiry is deemed appropriate. 

Again  a  reviewer  may  gauge  it  appropriate  to  have  somewhat  more  detail  than 
suggested  in  the  above  two  approaches.  In  that  case  a  more  detailed  description  of 
how  the  cost  pool  is  operated  will  be  required.  It  would,  however,  be  exceptional, 
within  the  context  of  this  paper,  to  perform  a  complete  audit  of  the  cost  pool. 
Nonetheless  as  well  as  an  overall  understanding  a  request  may  be  made  for  more 
detail in some relevant areas. 

37. 

Depending on which of the above approaches may align itself best to the facts and 
circumstances of the case all or some of the following cost pool information could be 
called for in as far as not already provided in any narrative: 

(a) 

(b) 

(c) 

(d) 

(e) 

(f) 

The  company/group  audit  standard  that  is  applied  to  the  pool  e.g.  materiality 
limits; standard of proof. 

An  explanation  of  the  cost  accounting  method  used  in  attributing  direct  and 
indirect  costs  to  the  pool.  A  description  of  how  costs  are  dealt  with  will  be 
needed where multi service provision centres exist. 

The  basis  on  which  costs  identified  as  shareholder  costs  were  specifically 
excluded from the pool. It may be that a separate analysis of these costs will be 
submitted for the sake of completeness. 

A description and analysis of the cost pool headings (e.g. IT, accounting, HR). 

The origin of any mark up applied and identification of costs allocated without 
mark up. 

A description and analysis of costs allocated. Detail here will particularly be in 
point where worldwide service costs are attributed to individual associates. 

EN 

13 

   EN 

(g) 

A  reconciliation  of  total  pool  costs  to  total  allocated  costs  to  guarantee  that 
costs allocated are not greater than total costs. 

VII.3. 

Invoicing 

38. 

39. 

40. 

Attention  is  also  drawn  to  what  can  be  described  as  legitimate  expectations  in 
carrying out a critical analysis of any cost pool. 

Often  invoices  will  not  be  available  where  the  costs  attributed  are  internally 
apportioned  direct  or  indirect  costs.  In  those  circumstances  an  explanation  of  the 
logic  and  process  applied  to  arrive  at  the  attributed  costs  will  be  needed.  In  the 
absence  of  an  absolute  figure  judgment  is  needed  to  appraise  whether  or  not  a 
particular cost is appropriate to be included in the cost pool and that the quantum is a 
fair reflection of the cost incurred. 

Where  invoices  do  exist  frequently  they  will  reflect  a  mix  of  external  third  party 
costs  as  well  as  internal  costs  in  an  amalgamated  final  invoice.  The  final  cost  is 
correctly  represented  by  one  final  invoice  albeit  that  invoice  is  the  result  of  earlier 
invoiced costs incurred by several entities contributing to the final service provided. 
For  example  associate  A  when  providing  routine  IT  support  may  sub-contract 
elements  of  that  support  to  associate  B.  Associate  B  may  in  turn  subcontract  to 
independent C. The invoice appearing in the cost pool of A will be that provided by 
associate  B.  In  this  type  of  scenario  whilst  it  is  a  reasonable  proposition  that  an 
invoice may be requested and its origin traced it would be unreasonable to expect a 
definitive  break  down  of  the  constituent  parts  of  any  invoice  through  B  to  C  and 
possibly  beyond.  This  is  not  least  because  an  invoice  provided  by  one  independent 
enterprise to another would generally not lead to (or would it necessarily be possible 
to provide) a breakdown of the origin and constituent parts of that invoice. 

VII.4.  Shareholder costs 

41. 

42. 

43. 

44. 

In  national  law,  administrative  procedures  and  case  law  there  are  not  many 
definitions or other information about activities that constitute a shareholder cost. 

The OECD guidelines refer to certain activities that constitute shareholder activities. 
At  Annex  2  is  a  non-exhaustive  list  that  includes  existing  OECD  elements  and 
additional services that the JTPF reviewed and recognized as ones that are regularly 
classified as shareholder costs. The classification will always depend on the specific 
facts and circumstances. 

There is though a fundamental benchmark test that can be applied when deciding if a 
cost is in fact a shareholder cost. 

This extract from Para. 7.9 of the OECD guidelines gives a clear statement on this 
issue: "In a narrow range of cases, an 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). Such an activity 
would  be  one  that  a  group  member  (usually  the  parent  company  or  a  regional 
holding company) performs solely because of its ownership interest in one or more 
other group members, i.e. in its capacity as shareholder. This type of activity would 
not justify a charge to the recipient companies". 

EN 

14 

   EN 

45. 

46. 

47. 

Judgment  is  required  when  an  activity  not  only  discharges  a  shareholder  duty  but 
also produces an additional benefit. A Board Member of a parent company may carry 
out  duties  related  to  the  ownership  interest  of  that  parent  in  other  group  members. 
That activity would normally be classified as a shareholder cost. Once a shareholder 
cost is identified it is inappropriate to charge that cost out either directly or through a 
cost pool. 

But in the execution of those duties initially for shareholder purposes it may be that 
the Board Member will discharge the duties in such a way that an additional service 
is  supplied  and  a  benefit  received  over  and  above  that  of  the  parent  company's 
ownership interest. 

In  that  case  the  question  arises  has  an  additional  service  in  fact  been  provided?  In 
answering that  question  considerations include:  does the whole  group benefit; or is 
the benefit attributable to a certain subsidiary, how are costs to be apportioned and 
the  correct  arm's  length  price  applied?  The  answer  lies  in  the  attribution  of  costs 
partly to the parent and partly to the subsidiaries. That attribution will be informed by 
the type of industry, the type of company and the service provided which then leads 
to the conclusion that a case by case approach can be the only viable approach. 

VII.5.  Allocation keys 

48. 

Two particularly relevant OECD guidelines comments about allocation keys are: 

"Any indirect- charge method should be sensitive to the commercial features of the 
individual case (e.g. the allocation key makes sense under the circumstances), 
contain  safeguards  against  manipulation  and  follow  sound  accounting 
principles and be capable of producing charges or allocations of costs that are 
commensurate with the actual or reasonably expected benefits to the recipient 
of the service" (OECD 7.23). 

"To  satisfy  the  arm's  length  principle  the  allocation  method  chosen  must  lead  to  a 
result  that  is  consistent  with  what  comparable  independent  enterprises  would 
have been prepared to accept." (OECD 7.24) 

The application of a self evident allocation key for a single service provision should 
not  present  the  reviewer  with  any  undue  problems  e.g.  payroll  service  allocated  by 
headcount. 

The  provision  of  more  than  one  service  under  a  single  contract  may  require  the 
deployment of several different allocation keys. Different rationales will be applied 
in  deciding  upon  an  allocation  key  depending  on  the  specific  circumstances.  It 
would,  however,  be  inconsistent  to  apply  a  different  allocation  key  to  different 
recipients of the same services. 

The touchstone is that any allocation key can be justified and is consistently applied 
(and is reviewed on a regular basis).A balance is needed between the precision of the 
key and the burden that would be created if a complex key is insisted upon that only 
gives a marginal improvement over a key that is operationally more easily applied. 

49. 

50. 

51. 

52. 

The  pragmatic  approach  outlined  above  is  that  whatever  allocation  key  is  decided 
upon it must be capable of being justified and applied consistently. 

EN 

15 

   EN 

53. 

Whilst the application of any particular allocation key will depend on the facts and 
circumstances of a particular case the following keys are in common usage: 

(a) 

IT: number of PCs 

(b) 

Business management software (e.g. SAP): number of licenses 

(c) 

Human Resources: headcount 

(d) 

Health and safety: headcount 

(e)  Management development: headcount 

(f) 

Tax, Accounting, etc: turnover or size of balance sheet 

(g)  Marketing services: turnover 

(h) 

Vehicle fleet management: number of cars 

54. 

55. 

It should be noted that more complex allocation keys might also be used. 

It  may  be  the  case  that  historically  an  allocation  key  has  been  agreed  that  reflects 
arm's length conditions and the consequent price. It is not intended these guidelines 
require an automatic review of what may already be in place. 

VII.6.  "On call services" (OECD 7.16-7.17) 

56. 

57. 

58. 

One  other  area  that  might  require  some  further  thought  is  the  treatment  of  what  are 
known variously as "on call contracts", "call off contracts" or "stand by contracts". In 
third party situations it is commonplace that arrangements will be made to make use 
of  a  service  as  and  when  required.  The  implication  of  that  is  threefold.  Should  a 
charge  be  made  merely  for  potential  access  to  a  service,  what,  if  any,  additional 
charge  should  be  made  if  the  service  is  actually  called  on  and  what  are  the 
ramifications if the service is not used in a particular year? 

Firstly, an infrastructure has to be in place to offer and meet the commitments in an 
on  call  arrangement.  In  some  cases  it  may  be  reasonable  that  a  charge  is  made  to 
cover  the  infrastructure  costs  and  a  mark  up.  Equally,  in  other  cases  it  may  be 
reasonable that a user pays a charge for potential access to that infrastructure but no 
additional  fee  when  the  agreed  on  call  service  provision  is  activated.  That  can  be 
contrasted to the situation where a specific  service is requested  over and  above the 
standard on call service. In that instance a separate additional fee is appropriate and a 
direct charge made. 

A member of the group may not require an on call service in any one year but that 
fact does not necessarily mean they will not buy into the service the next year. Nor 
does  it  automatically  mean  they  will  be  entitled  to  a  reduction  in  the  annual  fee 
because in one year it was not used. The fee will depend more on the perceived risk 
by the provider and the user's appetite for risk on a year on year basis. 

EN 

16 

   EN 

VII.7.  An arm's length charge 

59. 

As  has  often  been  said  transfer  pricing  is  an  art  not  an  exact  science  and  that 
proposition allows a degree of judgment about the level of evidence that is required 
to evaluate a transfer price and to ascertain that a particular method is a reasonable 
estimation of an arm's length price (OECD 1.12-1.13 and 1.68-1.69). 

VII.8.  Methodology 

60. 

61. 

62. 

It may be the case that historically a methodology other than those described in the 
OECD  guidelines  has  been  agreed  that  reflects  arm's  length  conditions  and  the 
consequent price (OECD1.68). It is not intended these guidelines should displace any 
such method. 

If a suitable CUP can readily be found for a particular service provision that will be 
the  most  expedient  route  to  resolution.  For  example,  the  service  under  review  has 
been supplied to independent third parties or a similar service has been received from 
a third party. 

With intra-group services, however, it is more often the case that appropriate CUPs 
cannot be located. Whilst generally any of the other OECD methods may be in point 
in  reviewing  that  a  service  provision  is  at  arm's  length  this  paper  notes  that  a  cost 
based method would be the most commonly observed method (OECD 7.31). 

VII.9.  Mark-up considerations 

63. 

64. 

65. 

66. 

As  the  low  value  adding  services  we  are  concerned  with  in  this  document  will 
typically  only  attract  a  modest  mark  up,  establishing  an  appropriate  cost  base  is 
relatively more important. 

Once  the  cost  base  of  a  particular  service  is  determined  it  is  then  appropriate  to 
consider  what  mark  up,  if  any,  on  those costs  should be applied. OECD guidelines 
recognize that it is not always the case that a mark up should be applied (OECD 7.33 
and 7.36). Indeed the guidelines go further in suggesting that although as a matter of 
principle a mark up may be appropriate a cost benefit analysis may be such that a tax 
administration may not pursue the matter beyond allocating costs. (OECD 7.37). 

In cases where it is appropriate to use a mark up, this will normally be modest and 
experience shows that typically agreed mark ups fall within a range of 3-10%, often 
around  5%.  However  that  statement  is  subject  to  the  facts  and  circumstances  that 
may support a different mark up. 

The character of the services that these guidelines address would suggest the in-depth 
analysis of the five comparability factors, including the functional analysis, together 
with  a  qualifying  benchmarking  exercise  covering  a  quantitative  and  qualitative 
screening of the potential comparables to establish a suitable mark up may be a too 
resource  intensive  approach.  It  may  be  envisaged,  therefore,  that  a  reviewer  will 
consider a less prominent search for information to evaluate the mark up put forward. 
However, the less prominent search should of course pass the arm’s length test. To a 
greater or lesser degree the following non-exhaustive list may be taken into account 
by a reviewer in arriving at a final position: 

EN 

17 

   EN 

(a) 

(b) 

(c) 

(d) 

The underlying rationale and evidence the service provider relied on in setting 
the mark up. 

The  experience  and  knowledge  of  the  reviewer  in  what  they  have  typically 
encountered  as  agreed  mark  ups  for  the  type  of  services  these  guidelines 
envisage. 

The wider body of evidence that is available from statistical research. 

Published practice /experience e.g. by some tax administrations.  

67. 

It  is  sometimes  the  case  that  the  same  mark  up  is  applied  to  a  range  of  services 
provided under a single contract. That may well be an acceptable proposition if it can 
be  judged  that  the  particular  services  would  attract  a  similar  mark  up  and  any 
variance is anticipated to be minimal. 

VIII.  DOCUMENTATION 

68. 

The OECD guidelines (Para.5.4) refer to prudent management principles that would 
govern the process of considering if transfer pricing is appropriate for tax purposes 
and the extent of any required level of supporting transfer pricing documentation. 

69. 

This theme is echoed at 2.3.1 of the JTPF report on EUTPD wherein it is recorded: 

"The  "prudent  business  management  principle",  based  on  economic  principles, 
implies  that  the  sort  of  evidence  that  would  be  appropriate  in  relation  to  a 
transaction of large value might be very different from the sort of evidence that 
would  be  appropriate  in  relation  to  a  transaction  where  the  overall  value  is 
significantly smaller". 

70. 

71. 

72. 

In  applying  this  principle  to  the  services  concentrated  on  by  these  guidelines 
documentation  including  written  agreements  may  not  be  available.  However,  the 
absence  of  written  documentation  should  not  be  the  deciding  factor  in  rejecting 
service  provision  or  benefit  but  rather  should  be  an  element  in  any  overall  fact 
pattern on which a decision is based (OECD 7.18). 

It is logical, taking into account the cumulative nature of this approach - addressing 
routine  services,  the  acceptance  of  certain  critical  assumptions,  provision  of  a 
narrative  and  cost  pool  explanations  -  that  the  purpose  of  requesting  supporting 
documentation will already have been met. 

However  it  may  be  useful  to  reiterate  what  a  useful  and  a  proportionate 
documentation pack may contain: 

(a) 

A narrative as detailed above. 

(b)  Written agreements. 

(c) 

Cost pool as detailed above. 

(d) 

Justification of OECD methodology applied. 

EN 

18 

   EN 

(e) 

(f) 

Verification of arm's length price applied. 

Invoicing system and invoices - see narrative. 

73. 

IX. 

74. 

75. 

76. 

77. 

78. 

79. 

X. 

80. 

81. 

82. 

It should be noted that information from one source (e.g. a written agreement) may 
cover information required from another source (e.g. a narrative). The extensive use 
of  computerized  systems  also  provides  the  opportunity  to  see  summary  level  detail 
which may then prevent the need for more extensive primary documentation. 

POST REVIEW CONSIDERATIONS 

It  is  recommended  that  for  future  reference  and  at  the  end  of  this  process  the 
narrative  becomes  a  file  note  in  conjunction  with  some  arrangement  for  regular 
updates. 

Continuing  the  theme  of  efficient  use  of  resource  it  would  be  counter  productive  to 
ignore what was established in an earlier review. An exception reporting procedure 
may be agreed wherein the status quo applies, with perhaps any appropriate pricing 
realignment being assumed, unless a tax administration is notified to the contrary. 

A  tax  administration  should  consider  if  an  exchange  of  information  would  be 
appropriate and an MNE may consider it worth dedicating a section of any EUTPD 
policy they may have to this particular area. 

In  line  with  the  Code  of  Conduct  on  EUTPD  Member  States  should  not  impose  a 
documentation related penalty where taxpayers comply in good faith, in a reasonable 
manner and within a reasonable time in supplying the information outlined above. 

A  review  may  result  in  an  adjustment.  If  the  adjustment  is  the  consequence  of 
rejecting a particular cost, reasons for that decision should be made clear so that the 
cost may be reallocated and maintain the principle that all costs are allocable. 

An  adjustment  may  then  form  the  basis  of  a  mutual  agreement  procedure  under  a 
DTA and/or the Arbitration Convention. In that case it would be appropriate to draw 
the  attention  of  the  Competent  Authorities  to  the  fact  that  the  guidelines  have  been 
applied.  In  the  absence  of  any  new  elements  acceptance  of  the  adjustment  without 
further enquiry might be a justifiable  

CONCLUSIONS 

The JTPF concludes that following these guidelines will facilitate the evaluation and 
acceptance that the arm's length principle has been applied in the majority of the cases 
that fall within the scope of these guidelines. 

The  JTPF  recognizes  that  this  report  is  specifically  targeted  at  low  value  adding 
services  but  some  of  the  critical  assumptions  and  elements  might  equally  apply  to 
more complex high value adding services. . 

The  JTPF  will  monitor  the  effect  of  these  guidelines  regularly  and  in  particular  to 
ensure the mark ups referred to remain relevant. 

EN 

19 

   EN 

Annex 1: List of intra-group services commonly provided that may or may not be within 
the scope of this paper. 

A. 

Information technology services, for example: 

A.1.  building, development and management of the information system; 

A.2.  study,  development,  installation  and  periodic/extraordinary  maintenance  of 

software; 

A.3.  study,  development,  installation  and  periodic/extraordinary  maintenance  of 

hardware system; 

A.4.  supply and transmission of data; and 

A.5.  backup services. 

B.  Human resource services, for example: 

B.1.  legislative,  contractual,  administrative,  social  security  and  fiscal  activities 

connected to the ordinary and extraordinary management of personnel; 

B.2.  selection and hiring of personnel; 

B.3.  assistance in defining career paths; 

B.4.  assistance  in  defining  compensations  and  benefit  schemes  (including  stock 

option plans); 

B.5.  definition of personnel evaluation process; 

B.6.  training of personnel; 

B.7.  supply of staff for limited period; 

B.8.  coordination  of  the  sharing  of  personnel  on  a  temporary  or  permanent  basis; 

and management of redundancies. 

C.  Marketing services, for example: 

C.1.  study, development and coordination of the marketing activities;  

C.2.  study, development and coordination of the sale promotions;  

C.3.  study, development and coordination of the advertising campaigns;  

C.4.  market research; 

C.5.  development and management of Internet website; 

C.6.  publication  of  magazines  handed  out  to  clients  of  the  subsidiary  (even  if 

concerning the whole group).  

EN 

20 

   EN 

D.  Legal services, for example: 

D.1.  assistance in drafting and reviewing of contracts and agreements; 

D.2.  ongoing legal consultation; 

D.3.  drafting and commissioning legal and tax opinions; 

D.4.  assistance in the fulfilment of legislative obligations; 

D.5.  assistance in the judicial litigation; 

D.6.  centralized management of relationship with insurance companies and brokers; 

D.7.  tax advice; 

D.8.  transfer pricing studies; and 

D.9.  protection of intangible property. 

E.  Accounting and administration services, for example: 

E.1.  assistance in the preparation of the budget and operating plans keeping of the 

mandatory books and accounts; 

E.2.  assistance  in  the  preparation  of  periodical  financial  statements,  annual  and 
extraordinary  balance  sheets  or  statements  of  account  (different  from  the 
consolidated financial statement); 

E.3.  assistance  in  compliance  with  fiscal  obligations,  such  as  filing  tax  returns, 

computing, and paying taxes, etc.; data processing; 

E.4.  audit  of  the  account  of  the  subsidiary;  and  management  of  the  invoicing 

process. 

F.  Technical services, for example: 

F.1.  Assistance regarding plant, machinery, equipment, processes, etc. 

F.2.  planning  and  executing  ordinary  and  extraordinary  maintenance  activities  on 

premises and plant;  

F.3.  planning  and  executing  ordinary  and  extraordinary  restructuring  activities  on 

premises and plant; 

F.4. 

transfer of technical know-how; 

F.5.  providing guidelines for the products’ innovation; 

F.6.  production planning to minimize excess capacity and meet demand efficiently;  

F.7.  assistance in planning and implementing capital expenditure;  

F.8.  efficiency monitoring; and  

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F.9.  engineering services. 

G.  Quality control services, for example: 

G.1.  providing  quality  policies  and  standards  of  the  production  and  provision  of 

services; 

G.2.  assistance in obtaining quality certifications (e.g. ISO 9000); and  

G.3.  development and implementation of client satisfaction programmes. 

H.  Other services: 

H.1.  strategy and business development services in case there is a connection with 

an existing or to be established subsidiary;  

H.2.  corporate security; 

H.3.  research and development; 

H.4.  real estate and facility management; 

H.5.  logistic services; 

H.6.  inventory management; 

H.7.  advice on transport and distribution strategy; 

H.8.  warehousing services; 

H.9.  purchasing services and sourcing raw materials; 

H.10. cost reduction management; 

H.11. packaging services. 

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Annex 2: Non-exhaustive and non-prescriptive list of shareholder costs (text in italic 
repeats OECD guidelines). 

From  the  discussion  held  in  the  JTPF  meeting  of  March  2009  it  can  be  concluded  that 
generally  the  costs  listed  in  this  table  can  be  considered  as  incurred  for  the  benefit  of  the 
parent company. However the JTPF concluded that the analysis will always require that the 
following questions be raised in relation to each cost listed: is it benefiting the whole group, 
does  it  benefit  the  parent  company  only,  should  it  be  allocated  out  to  the  subsidiaries,  or 
should  it  be  considered  to  benefit  to  a  certain  subsidiary?  Therefore  only  a  case  by  case 
approach can be taken. 

a. 

a.1. 

a.2. 

a.3. 

Description of costs to be considered as 
shareholders costs 

Comments 

Costs of activities relating to the 
juridical structure of the parent 
company itself such (see OECD 
guidelines para 7.10a) 

Generally shareholder cost but see 
below 

costs for the meeting shareholders of the 
parent company, including advertising 
costs  

Shareholders costs 

costs for the issuing of shares of the 
parent company 

Shareholders costs 

cost of the board of directors of the 
parent company that is associated with 
the statutory duties of a director as a 
member of the board of directors.  

The 1984 OECD Report admits that 
board members may perform activities 
that are to the benefit of the subsidiaries 
so that only part of the cost relating to 
the board of directors may be regarded 
as shareholder costs. This may be the 
case when one or more director(s) have 
qualifications and skills that go beyond 
the mere holding function and include 
knowhow and skills which are pertinent 
to the business of the subsidiaries. 

JTPF conclusions: 

A case by case approach is always 
appropriate because a director or board 
member could perform activities (partly 
or totally) for the specific benefit of a 
(some) subsidiary (ies) and thus could 
need to be allocated. 

a.4. 

costs for the compliance of the parent 
with the tax law (tax returns, 
bookkeeping, etc.)  

Shareholder costs 

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b. 

b.1. 

b.2. 

b.3. 

b.4. 

c. 

d. 

costs relating to reporting requirements 
of the parent company including the 
consolidation of reports (see OECD 
guidelines para 7.10b) 

Shareholder costs 

Costs for the consolidated financial 
report of the parent; 

Shareholder costs 

JTPF conclusions: 

Targeted costs: all costs that are 
necessary for consolidation at whatever 
level. 

It might be the costs relate to the parent 
company or the subsidiary and the 
question is who benefits? There might 
be a parallel benefit for the subsidiaries 
but consolidation is an activity of the 
group as such. Some members explained 
that in practice local costs for the 
subsidiaries are not passed on to the 
parent because it would be too costly to 
identify and to isolate those costs 

Shareholder costs 

Although under rare circumstances the 
subsidiary company may receive a 
benefit from the consolidation, such as 
the elimination of withholding taxes that 
would otherwise apply in the country of 
the parent company on payments made 
by the parent company. 

Costs for the consolidated financial 
statements of the group 

costs for the application and compliance 
with cross-border tax consolidation. Tax 
legislation of some Member States 
provide for cross-border tax 
consolidation that requires the parent 
company , to collect information from 
the subsidiaries and comply with formal 
requirements such as making tax 
adjustments of the accounts of the 
foreign subsidiaries to compute the 
consolidated income for company tax 
purposes. These costs are incurred for 
the exclusive benefit of the parent 
company; 

costs for the audit of the parent 

Shareholder costs 

Costs of raising funds for the acquisition 
of its [the parent 
company's]participations (see OECD 
guidelines para 7.10c) 

Costs of managerial and control 
(monitoring) activities related to the 
management and protection of the 
investments in participations unless an 

Shareholder costs 

Generally to be considered as 
Shareholder costs  

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d.1. 

independent party would have been 
willing to buy for or to perform for itself:

Costs of the parent company's audit of 
the accounts of the subsidiary if it is 
carried out exclusively in the interest of 
the parent;  

d.2. 

Costs for the drafting and auditing of the 
financial statements of the subsidiary in 
accordance with the accounting 
principles of the States of the parent 
(e.g. US GAAP)  

Shareholder costs 

However, if the audit is also in the 
interest of the subsidiary the activity is 
partly an intra-group service: this is the 
case when the audit is compulsory 
under the law of the state of 
incorporation of the subsidiary, when 
the audit report is published with the 
financial statement of the subsidiary or 
published on the website of the 
subsidiary or, in general, is used by the 
subsidiary (e.g. provided to a bank 
when the subsidiary applies for a loan 
or used by the management of the 
subsidiary itself). 

Shareholder costs, unless such activity 
has a positive effect for the activity of 
the subsidiary on its own and not 
simply because it is part of the group. 
This may be the case where the 
financial statement drafted by applying 
the accounting principles of the parent 
company is used by the parent company 
itself to services to the subsidiary, as 
market analysis, budgeting, etc… 

d.3. 

Costs of information technology 

JTPF conclusions: 

d.4. 

Costs for the general review of the 
affiliates' performance if not connected 
to the provisions of consulting services 
to the subsidiaries  

Those costs are rarely supported solely 
for the benefit of the parent company. 
Therefore a case by case approach is 
necessary. 

JTPF conclusion: 

Those costs can be performed 
exclusively for the parent and are in that 
case only shareholder costs however in 
many cases this can help to improve the 
subsidiary's management as well and 
thus require allocation 

e. 

Costs to reorganize the group, to acquire 
new members or to terminate a division  

JTPF conclusions: 

The OECD is actually discussing 
Business restructuring and future OECD 

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conclusions could be helpful. 

A case by case approach was suggested 
because the restructured entity could 
also have a direct benefit. 

OECD comments: The OECD notes that 
the wording in TPG 7.12 is “costs for 
analyzing the question whether to 
reorganize the group, to acquire new 
members, or to terminate a division” 
and that this is a significantly narrower 
scope. The OECD view is not to treat 
restructuring costs such as write off of 
assets, termination of employment 
contracts, etc. as shareholder costs or as 
a service, but rather to examine on a 
case-by-case basis which entity should 
bear these costs, depending in particular 
on the rights and other assets of the 
parties.  

There is some discussion in the OECD 
discussion draft on the transfer pricing 
aspects of business restructurings about 
which entity within an MNE group 
should bear the restructuring costs and 
the OECD tentatively concludes that 
depending on the facts and 
circumstances of the case, it could be 
the restructured entity, another group 
entity that benefits from a relocation of 
activity, the parent company, several 
group entities, etc 

Shareholder costs  

Costs for initial listing on a stock 
exchange of the parent and costs for the 
activities related to stock market listing 
of the parent, in the years after the initial 
listing (e.g. preparation of documents 
required by the stock market 
supervisory body). 

Investor relations' costs of the parent 
company  

Shareholder costs 

costs for press conferences and other 
communications with (i) shareholders of 
the parent company (ii) financial 
analysts , (iii) funds and (iv) other 
stakeholders of the parent company; 

f. 

g.  

g.1. 

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h. 

i. 

j. 

Study and implementation of the 
capitalization structure of the 
subsidiaries  

Costs for the increase of the share 
capital of the subsidiary  

Other activity you indentify as 
shareholder activity: 

Activities relating to the adoption and 
enforcement with statutory rules and 
rules of conduct with regard to 
"corporate governance" by the parent 
company itself or the group as whole  

Case by case approach  

Case by case approach 

Shareholder costs 

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Appendix II 

REPORT ON NON-EU TRIANGULAR CASES 

1. 

1. 

2. 

3. 

4. 

2. 

5. 

6. 

PREAMBLE 

In accordance with the discussion held at the Joint Transfer Pricing Forum (JTPF) in 
its meetings of October, 23rd, 2007 and February 21st, 2008 a sub-group was asked to 
discuss  further  the  issue  of  triangular  transfer  pricing  cases.  The  sub-group  met  in 
Brussels on 15 January 2008, 29th April 2008, 8th July, 2008 and 23rd January 2009. 

This report is based on the work of the sub-group as reported to the plenary meeting 
of March 2009. 

This  JTPF  report  provides  some  non-prescriptive  suggestions  regarding  dispute 
resolution relating to transfer pricing cases in the case of non-EU triangular transfer 
pricing, as hereafter defined, without any prejudice to whether or not such cases may 
be covered in part or whole by the EU Arbitration Convention. 

It  is  neither  the  intention  that  Competent  Authorities  (CA)  activity  in  non-EU 
triangular cases would provide any greater certainty than for EU triangular cases nor 
that the non-EU definition denies access to the Arbitration Convention only because 
a non-EU state is involved. 

DEFINITION OF TRIANGULAR CASES (IN THE CONTEXT OF MAP) 

To assist in focusing the JTPF discussion it was suggested to adopt a definition on 
triangular  cases  which  is  intended  to  be  neither  too  broad  nor  too  narrow.  This 
adopted definition duplicates the one included in the report on EU triangular cases. 

For  the  purpose  of  this  document  a  triangular  case  is  a  case  where  two  states  in  a 
MAP cannot fully resolve any double taxation arising in a transfer pricing case when 
applying  the  ALP  because  an  associated  enterprise  [as  defined  in  the  Arbitration 
Convention]  situated  in  a  Third  State  and  identified  by  both  EU  CAs  (evidential 
based on the comparability analysis including a functional analysis and other factual 
elements) had a significant influence in contributing to a non arm’s length result in a 
chain of relevant transactions or commercial / financial relations and recognized as 
such by the taxpayer suffering the double taxation and requesting the MAP. 

7. 

Two types of cases can be distinguished: 

– 

– 

cases  where  all  associated  companies  concerned  are  situated  within  the  EU 
(hereafter referred to as EU triangular cases); 

cases where the associated company identified as being the source of non arm’s 
length  results  in  a  chain  of  relevant  transactions  or  commercial  /  financial 
relations is situated outside the EU (hereafter referred to as non-EU triangular 
cases). 

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3. 

POTENTIAL APPROACHES TO NON-EU TRIANGULAR CASES 

3.1. 

Treaty network 

3.1.1. 

Improvement and extension of the treaty network 

8. 

In  the  absence  of  a  Double  Taxation  Agreement  (DTA)  or  where  a  DTA  does  not 
contain a Mutual Agreement Provision (MAP) provision, there is no clear process to 
facilitate  the  elimination  of  double  tax.  To  remedy  this  situation  an  extensive 
network  of  treaties  between  both  EU  Member  States  and  non-EU  Member  States, 
which contain an effective MAP Article, is considered vital. 

3.1.2. 

Inclusion  of  Article  25  (5)  of  the  Organisation  for  Economic  Co-Operation  and 
development (OECD) Model Tax Convention (MTC) 

9. 

10. 

11. 

12. 

13. 

The  MAP  procedure  in  most  current  DTAs  does  not  require  the  Competent 
Authorities (CAs) to reach an agreement that eliminates the double taxation but only 
that  they  use  best  endeavours  to  resolve  the  case.  Where,  after  applying  best 
endeavours,  Competent  Authorities  cannot  agree,  unrelieved  double  taxation  or 
taxation  not  in  accordance  with  the  tax  treaty  may  result.  This  situation  is  a  major 
source  of  concern  for  taxpayers  and  CAs.  Recent  developments  in  the  work  of 
OECD on Article 25(5) of the MTC provide the option of mandatory arbitration. 

According to paragraph 64 of the OECD Commentary to this provision, paragraph 5 
of Article 25 "…is [therefore] an extension of the mutual agreement procedure that 
serves  to  enhance  the  effectiveness  of  that  procedure  by  ensuring  that  where  the 
competent authorities cannot reach an agreement on one or more issues that prevent 
the resolution of a case, a resolution of the case will still be possible by submitting 
those issues to arbitration …". 

Therefore,  as  far  as  bilateral  DTAs  will  include  such  a  clause,  the  effectiveness  of 
MAP will be strengthened. 

It would be also helpful if EU Member States were able to indicate whether or not in 
negotiating or reviewing their tax treaties, they will propose to include article 25(5) 
of the OECD MTC. 

Some practical aspects of the inclusion of the new Article 25(5) were also discussed. 
It  was  considered  that,  in  applying  article  25(5)  of  the  OECD  MTC  in  bilateral  tax 
treaties, Competent Authorities could face implementation difficulties in the absence 
of clear rules (e.g. how to set up an advisory commission, how to select the members, 
how to share the costs, language to be used, how to select a point in the range, etc.). 
This could lead to very long procedures including the risk of ultimately stepping out 
of  the  Art.  25.5  arbitration  process.  However  the  model  mode  of  application 
(“sample  mutual  agreement  on  arbitration”)  which  is  included  as  an  annex  to  the 
OECD’s update of the Commentary to Article 25 might be useful in this respect. 

3.2. 

A case by case approach to resolution 

14. 

The following routes to resolution are put forward but it is emphasized that the facts 
and circumstances of particular cases will finally determine if a proposed solution is 
appropriate. 

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3.2.1.  Resolution of the issue prospectively: Advance Pricing Agreements (APA) 

15. 

16. 

One  approach  may  be  to  enter  into  an  APA  relating  to  the  transactions  in  order  to 
avoid the issue arising for prospective years. Moreover by concluding an APA, CAs 
could  agree  to  apply  the  outcome  of  the  APA  to  previous  years  covered  by  the 
pending  MAP  procedures  through  an  official  or  informal  agreement  taking  into 
consideration the possibilities allowed under domestic law. 

On  the  issue  of  potential  roll  back,  the  subgroup  referred  to  point  8.3  of  the 
Guidelines for APAs in the EU, included as an annex to the Communication from the 
Commission  to  the  Council,  the  European  Parliament  and  the  European  Economic 
and  Social  Committee  on  the  work  of  the  EU  Joint  Transfer  Pricing  Forum  in  the 
field of dispute avoidance and resolution procedures and on Guidelines for Advance 
Pricing Agreements within the EU (COM (2007) 71 final) of 26 February 2007, that 
reads: 

“8.3. Rollback 

58. 
Rollback  –  when  provided  for  in  domestic  legislation  –  can  be 
considered  where  it  will  resolve  disputes  or  remove  the  possibility  of 
disputes in earlier periods. 

Rollback  should  only  be  a  secondary  result  of  the  APA  and  should  only  be 
carried  out  where  it  is  appropriate  to  the  facts  of  the  case.  Similar  facts  and 
circumstances to those in the APA should have existed for previous periods in 
order for rollback to be appropriate. 

Rollback of the APA should only be applied with the taxpayer's consent. 

A tax administration has recourse to the usual domestic measures if, as part of 
the  APA  process,  it  discovers  information  which  would  affect  the  taxation  of 
earlier periods. But tax administrations should advise the taxpayer of any such 
intended action to give the taxpayer the opportunity of explaining any apparent 
inconsistency before making a tax re-assessment concerning previous periods.” 

For further consideration see paragraph 77 of APA report 

3.2.2.  Article 25 (3) of the OECD MTC 

17. 

18. 

Article 25(3) of the OECD MTC, where incorporated in the relevant treaties between 
the  parties,  might  be  interpreted  such  that  it  extends  the  scope  of  Art  25  to  solve 
disputes  relating  to  transfer  pricing  adjustment  in  the  case  of  non-EU  triangular 
transfer pricing cases and provides the option of a tri-lateral approach to eliminating 
that double tax. However not all DTC`s follow the language of the MTC to facilitate 
this interpretation. 

In  those  cases  a  possibility  could  be  the  conclusion  of  a  separate  and  specific 
(bilateral/multilateral)  protocol  /  (additional)  convention  to  solve  such  cases. 
However,  the  approval  of  this  protocol  /  (additional)  convention  might  necessitate 
adoption through the legislative chambers – which might take considerable time. 

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3.2.3.  Extension of the AC to a third State 

19. 

It may be worthwhile exploring on a case by case basis whether the provisions of the 
AC can be extended to a Third State, based upon Articles 35 and 36 of the Vienna 
Convention on the law of treaties assuming acceptance of such rights or obligations 
by  the  Third  State.  CAs  may  wish  to  consider  using  this  instrument  to  involve  the 
third  country  in  the  proceedings  as  well.  This  extension  would  only  bind  the  CAs 
involved in the specific case. 

20. 

Articles 35 and 36 of Vienna Convention on the law of treaties read: 

“Article 35: Treaties providing for obligations for third States 

An obligation arises for a third State from a provision of a treaty if the parties 
to the treaty intend the provision to be the means of establishing the obligation 
and the third State expressly accepts that obligation in writing. 

Article 36: Treaties providing for rights for third States 

A right arises for a third State from a provision of a treaty if the parties to the 
treaty intend the provision to accord that right either to the third State, or to a 
group of States to which it belongs, or to all States, and the third State assents 
thereto.  Its  assent  shall  be  presumed  so  long  as  the  contrary  is  not  indicated, 
unless the treaty otherwise provides. 

A State exercising a right in accordance with paragraph 1 shall comply with the 
conditions  for  its  exercise  provided  for  in  the  treaty  or  established  in 
conformity with the treaty.” 

3.3. 

Procedural considerations 

3.3.1.  The role of the taxpayer 

21. 

22. 

23. 

24. 

The JTPF recognizes the key role of the taxpayer in non-EU triangular cases. 

Although the MAP is in essence a procedure between tax administrations, in view of 
the specific nature of the triangular cases, more involvement of the taxpayers in the 
MAP could be envisaged for example by providing additional information requested 
and points of factual clarification. 

In this context it must also be added that it is primarily for the taxpayer to identify 
the  commercial/financial  relationship(s)  resulting  in  double  taxation.  The  taxpayer 
needs to provide a comprehensive analysis of all relevant facts and present evidenced 
based reasons as to which contracting States should start the appropriate procedure. 
Adoption  of  the  concepts  within  the  European  Union  code  of  conduct  on  transfer 
pricing documentation for associated enterprises (EUTPD) might be quite helpful. 

As soon as possible the taxpayer should inform the CAs that (an) other party (ies) in 
(a)  third  non-EU  MS(s)  is  (are)  involved.  Indeed  without  such  information  the 
resolution of the case could be impossible due to the different deadlines. It is in the 
interest  of  both  tax  administrations  and  taxpayer(s)  that  a  co-operative  position  is 
taken  to  achieve  swift  resolution.  This  implies  the  timely  exchange  of  information 

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and  delivery  of  documentation  by  all  stakeholders 
administrations). 

(including 

the 

tax 

3.3.2.  Coordinated actions between EU CAs 

25. 

In  an  identified  non-EU  triangular  case  the  participation  of  non-EU  competent 
authorities  is  crucial  to  eliminate  double  taxation.  The  EU  competent  authorities 
should agree how to discuss the case and who is best placed to make initial contact 
with the appropriate non-EU Competent Authority, in order to instigate a procedure 
to implement efficiently the MAP process. 

3.3.3.  Extension of the two-year term 

Where  appropriate,  to  give  enough  time  to  the  CAs  involved  to  reach  an  adequate 
and acceptable solution invoking paragraph 4 of Article 7 may be considered, i.e., by 
mutual  agreement,  and  with  the  agreement  of  the  associated  enterprises  concerned, 
the  two-year  time  limits  of  paragraph  1  of  Article  7  may  be  extended.  If  this 
option/solution is pursued, it is strongly recommended that parties agree on the term 
of the extension of the two-year term in advance as well, and do not agree to an open-
ended extension. That way, the taxpayer’s rights  would be  safeguarded and  the tax 
authorities would be able to pursue an equitable resolution although taking more time 
than usual under Article 7 of the AC. 

CONCLUSION 

The JTPF believes that, in the light of practical experience to date, it has taken the 
discussion  as  far  as  it  is  possible.  However  future  developments,  as  countries  and 
businesses gain more experience in the subject, may bring the item back on the JTPF 
work programme. 

26. 

4. 

27. 

28. 

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