OECD discussion paper on intra-group services

The OECD discussion paper on intra-group services (revision of Chapter VII of the OECD Transfer Pricing Guidelines) pursues one core objective: The existing principles remain unchanged, but are adapted to the current guidelines (Chapters I–III), clarified, and supported by numerous practical examples. For internationally active companies, this is less about a “new” system and more about clearer expectations from tax authorities.

Below you will find a structured overview for practical application – focusing on the impact on transfer pricing and the relevance for German taxpayers.

1. Background and objective of the discussion paper

• Intra-group services have gained considerable importance due to the growing share of services in corporations (IT, shared services, central functions, digital business models).
• The OECD is revising Chapter VII to:
  • to more closely link the guidelines on intra-group services to the general basic principles (Chapters I–III) (in particular “accurate delineation”),
  • to clarify practical questions of doubt (e.g., benefit test, shareholder activities, duplication of effort, low value-adding services),
  • and to create more legal certainty through numerous examples (21 examples).
• The OECD explicitly emphasizes that the fundamental principles remain unchanged. This is about clarification, not a systemic change.

2. Central guiding principle: “Accurate delineation” of services

The starting point for every analysis – as with all intra-group transactions – is the accurate delineation of the actual process:

• Which functions are performed by whom?
• What assets (including intangibles) are being used?
• Who bears which economically significant risks?
• How are services intertwined with other transactions (goods deliveries, licenses)?

Important for practical purposes:

• The labeling (“Service Fee”, “Management Fee”) or the existence of contracts is no Proof that a service is actually being provided.
• Conversely, a service may also exist without a formal contract or payment flow if an affiliated company provides services for which an independent company would pay.
• There are no guess This suggests that services should always be priced using one-sided methods (Cost Plus, TNMM). The choice of method depends on the functional and risk profile.

Example scenario:

• A manufacturing company operates complex facilities and uses its own fixed assets, while the group provides central intellectual property and processes. Depending on its risk profile, the company can be classified as a "routine manufacturer" (Cost Plus/TNMM) or as a separate business unit. The discussion paper emphasizes that this classification must be consistently derived from the functional/risk analysis.

3. The “Benefit Test”: When does a service actually exist?

Key question: Would an independent company be willing to pay for the service or provide it itself under comparable circumstances?

Elements of the Benefit Test:

• A economic or commercial value must be recognizable to the recipient:
  • higher revenues or better profitability,
  • Cost or risk reduction,
  • Efficiency or quality improvements, e.g. through standardization or centralized IT.
• The benefit can expected to be; a subsequent lack of success does not negate the service if the benefit could reasonably have been expected at the outset.
• The examination will take place per recipientWho specifically benefits, and who doesn't?

Practical example (ERP project)

• A group company develops a unified ERP system and rolls it out globally.
• A subsidiary is unable to implement the system within the planned timeframe due to internal problems (departure of key personnel).
• According to the OECD, a service is still provided because there was a reasonable, expected benefit at the start of the project. In practice, this means that the failure of an implementation or poor results are not grounds for categorically rejecting the service fee.

Example: Hotel group (market/sales support)

• A central unit is building a new corporate customer unit, identifying target customers, and developing campaigns and programs.
• In one region, sales are increasing as planned: clear benefit, benefit test fulfilled.
• In another region, new competitors prevent the expected sales – nevertheless, the benefit test remains fulfilled as long as the approach was economically sensible ex ante.
• Third society only benefits from exogenous factors (tourism boom); there lies no Reference to the central service – therefore no service fee.

For German companies, this means:

• The ex-ante view This is crucial. The documentation should include expectations, business cases, and decision-making documents.
• Poor results (losses) are not proof that a service was not provided. However, a clear explanation of the causes is crucial to avoid disputes during a tax audit.

4. Typical demarcation issues: shareholder activities, duplication of effort, “incidental benefits”, on-call services

4.1 Shareholder activities

As Shareholder activities Services of a parent or holding company apply, which exclusively from their position as shareholders and only themselves use them. They justify no billable service:

Typical examples:

• Measures relating to its own legal structure (general meetings, listing, supervisory board).
• Consolidated financial statements and reporting obligations, insofar as they only concern the parent company.
• The parent company's own tax compliance management.
• Investor Relations of the parent company.
• Pure M&A activities for group portfolio management, provided they only incidentally benefit other group companies.

Important:

• The OECD clearly differentiates between shareholder activities and broader "stewardship activities." The latter can very well be billable services (e.g., centralized emergency management, centralized decision support, intensive operational controlling).

Practical message:

• Not every activity of top management is automatically "shareholder" or automatically a service. The decisive factor is the specific function:
  • Does the parent company develop and implement operational measures to improve the subsidiary's performance? → tends to be a service.
  • Does it only fulfill its own reporting obligations to the capital market/authorities? → Shareholders.

4.2 Duplication of work

Principle:

• No service, if an activity merely duplicates an activity that the recipient already performs or obtains from another service provider – unless the duplication is deliberate and economically sensible (e.g. second opinion, risk hedging, regulatory requirements regarding duplicate structures).

For example:

• Marketing activities of a central unit and a local unit are not automatically duplicated. The crucial factor is whether they fulfill different functions (e.g., global brand strategy vs. local campaigns, translations, legal compliance checks).

4.3 Incidental Benefits

• Services that directly benefit one company can only be provided to other group companies if they directly benefit one company. coincidentally to contribute to the benefit (e.g., through better creditworthiness of the group, portfolio optimization, more favorable purchase prices).
• Such Incidental benefits do not justify a service fee. to the "co-beneficiaries", since there is no independent benefit that requires remuneration.

Practical example:

• A parent company sells a loss-making subsidiary, thereby improving its key performance indicators and financing options – other group companies benefit indirectly. The OECD views the transaction as a shareholder activity; the other beneficiaries should not be burdened.

4.4 On-Call Services

• On-call services (e.g., constant availability of legal, IT, or crisis management teams) can already be provided by the readiness have a chargeable value – provided that an independent company would also pay a “standby fee” under similar circumstances.
• Typical benchmark considerations:
  • Retainer agreements with law firms.
  • Maintenance contracts with SLAs (Service Level Agreements).

For practical purposes:

• When on-call structures are used, conditions and usage should be reviewed and documented over several years to demonstrate their appropriateness.

5. Pricing of services: Direct vs. indirect charging and choice of method

5.1 Direct charge

• Recommended if:
  • Services can be clearly assigned to a specific recipient.
  • Effort (time, costs, resources) can be captured without disproportionate effort (e.g. project IT, individual consulting).
• Advantage: High transparency towards the tax authorities and lower risk of double taxation.

5.2 Indirect charge

• This is common in practice for central services that benefit multiple companies:
  • central marketing, IT platforms, HR services.
• Requires:
  • an transparent cost pool,
  • appropriate allocation keys (Headcount, revenue, number of users, assets, transaction volume),
  • Consistent application and documentation (no "overallocation" exceeding 100% of costs).

risks:

• The connection between concrete benefit and calculated fee can become blurred.
• Without proper documentation (description of services, selection and calculation of allocation keys), the risk of additions and double taxation increases.

5.3 Choice of method

The OECD clarifies:

• There are no “service method of choice”Any OECD method can be appropriate for services as well:
  • CUP (if comparable services are available on the market),
  • Cost Plus or TNMM (common for routine services),
  • Transactional Profit Split (with unique contributions from both sides and high integration),
  • In individual cases, other methods are used.

Particularly emphasized:

• CUP is only applicable where there is a high degree of comparability (market, quality, scope of services). Differences in cost levels or service content must be adjusted – where possible – otherwise CUP is not applicable.
• Cost Plus / TNMM:
  • They require a clear definition of the cost basis (direct, indirect, general costs).
  • Controlled upfront costs (e.g., head office fees, licenses) must not distort the cost picture.
• Profit Split:
  • Relevance is particularly important in complex service constellations where multiple parties contribute unique intangibles and significant risks (e.g., research-intensive services, data-driven business models).

6. Low Value Adding Services: Confirmation and clarification of the “Safe Harbour”

The section on Low-Value-Adding Intra-Group Services (LVAS) essentially adopts the existing concept, but specifies:

6.1 Definition

Low value adding services are:

• supporting activities,
• not part of the core business,
• without the use or creation of unique, valuable intangible assets,
• without assuming or controlling significant risks.

Typical examples:

• Accounting, basic controlling tasks.
• Standard HR services (payroll, recruiting support, training organization).
• IT support, helpdesk, maintenance of standardized systems.
• Standard tax compliance, internal administration, general legal advice.

Excluded are, among others:

• R&D, software development (unless it's just IT support),
• Production and procurement of nuclear raw materials,
• Sales, Marketing, Distribution
• Financial transactions, insurance/reinsurance,
• Senior Management Services,
• The group's core services.

Important:

• That a performance not Being classified as an LVAS does not mean that it has to be "highly profitable"; it simply means that it is not eligible for the simplified regime.

6.2 Simplified Approach

The core of the existing "safe harbor mechanism" is confirmed:

• formation of Cost pools per service category (direct + indirect costs).
• Exclusion of services that benefit only one recipient (these can be priced separately, but according to the same principles).
• Usage appropriate allocation key (Headcount, revenue, number of users, etc.).
• Application of one uniform surcharge of 5% (without a separate benchmark study) on all costs in the pool (with the exception of pure pass-through items).
• Additional documentation requirements (description of services, qualification as LVAS, definition of pools and keys).

The OECD explicitly emphasizes:

• The 5% surcharge is no general benchmark for all services. It may not be used to justify other services (outside the LVAS definition) without additional analysis – neither upwards nor downwards.

7. Documentation: Focus on demonstrating the benefits and transparency of the allocation

The OECD supplements the general documentation requirements for transfer pricing with specific guidance on services:

Key elements:

• Description of the types of services, recipients and expected benefits.
• Functional analysis of the service unit(s).
• Presentation of the cost basis (direct/indirect/overhead costs), possibly with sample documents (invoices, timesheets).
• Description of the allocation methodology:
  • selected key,
  • Justification of suitability,
  • Reconciliation of the total allocated costs with the cost pool (no "over-charging").
• Evidence of compliance with the Benefit Test:
  • Project documents, email correspondence, meeting minutes,
  • Reports, deliverables, systemic evidence (e.g. IT tickets; representative samples are sufficient here),
  • Explanation of why an expected benefit may not have materialized.

For German taxpayers:

• The already stringent documentation requirements in Germany are further reinforced by the OECD guidelines. Adhering to the OECD standard creates a better starting point for tax audits, also in light of potential double taxation risks.
• Particularly important is a Clear distinction between shareholder costs and chargeable services and a sound documentation of the benefit-relatedness for each recipient.

8. What happens to the discussion paper now?

The current status:

• It is one of public consultation draft (Public Consultation Document) of the OECD Working Party No. 6.
• Comments from stakeholders (companies, associations, consultants, administrations) are expected by the deadline stated in the document.
• After evaluating the comments received, WP6 prepares a revised draft and submits it to the Committee on Fiscal Affairs.
• Only then will it be formally included in the OECD Transfer Pricing Guidelines.

Important for practical purposes:

• The document reflects no OECD consensus yet contrary.
• Taxpayers and tax authorities should use the approaches presented in the draft. not as a binding standard apply.
• However, the paper clearly shows, in which direction expectations are developingIn future tax audits, it is to be expected that tax authorities – including in Germany – will adopt lines of argumentation and examples from this paper as soon as they become OECD consensus.

9. Potential impact on transfer pricing practice – with a focus on Germany

Even though the draft is not yet binding, internationally active groups should already be examining which adjustments would be sensible in the medium term:

1. Review of existing service structures
   • Are service descriptions precise enough to allow for "accurate delineation"?
   • Do the functional and risk delineations actually correspond to operational reality?
   • Are there areas where services are actually provided but are not priced or not priced appropriately (or vice versa)?
2. Sharp distinction between shareholder activities
   • Systematic identification of costs that exclusively benefit the shareholder level.
   • Clear separation in internal cost accounting (cost centers, cost keys).
   • This is particularly relevant for Germany, as auditors often try to reduce management fees proportionally – a clear allocation between shareholders and services creates a defense potential here.
3. Benefit Test per recipient
   • Examination to determine whether each recipient of the service actually derives a comprehensible, ex-ante expected benefit from the service.
   • Adaptation of allocation keys to the actual benefit structure; if necessary, removal of companies for which no real benefit can be demonstrated.
   • Also important with regard to Section 1 of the Foreign Tax Act and the German documentation requirements.
4. Revision of documentation practices
   • Supplemented by the evidence highlighted by the OECD (especially for IT, marketing and management services).
   • Examine whether the use of representative samples (e.g., IT tickets) can reduce the documentation effort without weakening the defense capability.
5. Targeted use of the Low Value Adding Services approach
   • Identification of service areas that clearly qualify as LVAS (e.g., IT helpdesk, basic HR services).
   • Examination of whether the 5% approach can be implemented across the entire group in a consistent manner.
   • In communication with the German tax authorities, the OECD approach can be a strong argument for planning certainty and administrative simplification, even if there is no formal legal basis for it in Germany.
6. Outlook on disputes and amicable settlement procedures
   • Since the paper provides numerous examples of delimitation and assessment issues, it is to be expected that these will also be used in mutual agreement procedures/MAPs in the future.
   • For German taxpayers, an argument based on the OECD examples can help to resolve double taxation more efficiently.

10. Fazit

The OECD discussion paper on intra-group services clarifies the framework within which internationally active companies operate:

• No new system, but clearly defined expectations.
• Strong focus on:
  • accurate delineation of transactions,
  • consistent application of the Benefit Test,
  • clear separation of shareholder costs,
  • transparent allocation keys,
  • and reliable documentation.

For German taxpayers with international service structures, this means:

• Those who already align their transfer pricing system and documentation with the principles enshrined in the draft will reduce costs in the medium to long term. Audit risks, especially in the sensitive area of ​​management and service fees.
• In return, the requirements for transparency, stringency and documentation increase – especially where central services are billed via flat-rate allocation keys.