How to Determine Arm’s Length Price for Intragroup Services?
One or more members of a multinational Enterprise (MNE) group often render services that provide a benefit to the other members of the same group. These intragroup services often include services that are typically available externally from third parties (such as legal and accounting services), in addition to those that are ordinarily performed internally (internal auditing or human resources).
If a service qualifies as an intragroup service, it should be identified and remunerated in line with the Arm’s Length Principle. This can be a complex process but you can navigate it by hiring the expertise of the best transfer pricing advisers in Dubai, UAE.
After identifying whether an intragroup service has been rendered, entities need to determine whether the charge for the service is as per the Arm’s Length Principle. This blog will provide you with detailed insights into the process of determining the arm’s length charge for intragroup services.
Let us dive in to learn more:
Perform comparability analysis
To determine the arm’s length charge for an intragroup service, a comparability analysis must be conducted in the first step. You need to analyse important considerations such as the value of the service to the recipient and how much a comparable independent enterprise would be prepared to pay for that service in comparable circumstances, as well as the costs to the service provider.
Most appropriate Transfer Pricing method
The most commonly used transfer pricing methods for intragroup services are the Comparable Uncontrolled Price (CUP) method and the cost-based method (Cost Plus Method or Transactional Net Margin Method using a cost-based profit level indicator).
The UAE transfer pricing guide recommends the CUP method as the most appropriate method where there is a comparable service provided between independent enterprises, or by the Related Party providing the services to an independent enterprise in comparable circumstances.
Direct & Indirect Charge Methods
MNEs can adopt direct charging agreements if services similar to those rendered to Related Parties or Connected Persons are also rendered to independent parties. However, the rendering of such services should be in a comparable manner and as a significant part of its business. In such cases, the MNE has the ability to demonstrate a separate basis for the charge.
However, this approach will not fit for cases where, for example, the services to independent parties are merely occasional or marginal. The direct charge method will be challenging in cases where there is a centralised management services activity performed for the benefit of multiple entities within a Group at the same time.
In such scenarios, MNE Groups may have to resort to cost allocation and apportionment methods. Where cost allocation and apportionment methods are used, these are considered indirect charge methods.
When using the indirect method, the Taxable Person needs to take into account the commercial features of the individual case (for example, whether the allocation key is reasonable under the circumstances).
Determination of the Cost Base
If an MNE group finds the cost-based method to be the most appropriate method, the relevant cost base should be determined.
Apply profit mark-up
The services provider needs to apply a markup to all costs that are not pass-through to determine the arm’s length price. The markup should be determined using comparable data.
The UAE Transfer Pricing Guide, however, adopts a simplified approach as provided under Chapter VII of the OECD Transfer Pricing Guidelines to reduce the compliance burden of the taxable persons. As per this approach, certain low-value-adding intra-group services may be charged out at a cost-plus 5% markup without the need for a detailed benchmarking analysis.
The Best Transfer Pricing Advisory Services in UAE
Determining an appropriate arm’s length price for an intra-group service can be a complex process for MNE groups in the UAE. Tax Gian, a brand of Jitendra Tax Consultants (JTC), provides bespoke transfer pricing advisory services in Dubai so that transfer pricing compliance becomes easier for MNEs. We have a team of highly qualified tax experts who can assist in analysing intragroup services and determining arm’s length prices for intra-group services.
Tax Gian is one of the top transfer pricing advisers in Dubai with years of experience. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. Call us today to ensure your entity is complying with the UAE transfer pricing regulations.
