The Organisation for Economic Co-operation and Development (OECD) released a public discussion draft (DD) pertaining to the Base Erosion and Profit Shifting (BEPS) Action Plan 10 on 3 November 2014. The DD intends to reduce the scope for erosion of the tax base by means of the charging of excessive management fees and head office expenses.
In establishing an approach, reference is made to so-called low value-adding intra-group services where a simplified approach can be adopted. In such instance the mark-up selected by the taxpayer cannot be less than 2% of the cost nor should it be greater than 5% thereof.
The concept of low value-adding intra-group services have been identified as services that are performed by one member of a multinational group to other group members which:
- are of a supportive nature;
- are not part of the core business of the multinational group;
- do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles; and
- do not involve the assumption or control of substantial or significant risk and do not give rise to the creation of significant risk.
Examples of these types of services are the following:
- accounting and auditing;
- processing and management of accounts;
- human-resource activities, for example staffing and recruitment, training and employee development and remuneration services;
- information technology services where they do not form part of the principal activity of the group;
- legal services;
- activities with regard to tax obligations, for instance information gathering and preparation of tax returns.
In determining what services should be subject to a cost recovery and mark-up, it is specifically indicated that so-called ‘shareholder activities’ cannot be charged for as they are performed solely because of the ownership interest by the holding entity. It is indicated that the concept of a shareholder activity is narrower from the broader term that was previously used, being a ‘stewardship activity’. It is indicated that stewardship activities covered a range of activities including the provision of services that could justify a charge, for instance emergency management and technical advice. However, the following shareholder activities are not regarded as services:
- costs relating to the juridical structure of the parent company itself, such as shareholders meetings, the issuing of shares, listing costs and the costs of a supervisory board;
- costs relating to reporting requirements of the parent company, including the consolidation of reports;
- costs of raising funds for the acquisition of participations and costs relating to the parent company’s investor relations such as communication strategy with shareholders;
- costs relating to compliance of the parent company with tax laws; and
- costs which are ancillary to the corporate governance of the multinational entity as a whole.