• Johannes Uhde, Senior Manager |

The OECD's simplified approach to remunerate and document intra-group low value-adding services is increasingly being adopted by multinationals in their operational Transfer Pricing and compliance processes. When can taxpayers benefit from this approach and what are the opportunities and risks?


With the increasing complexity of global value chains of multinational enterprises, many companies have seen a general increase in their cross-border service transactions between related parties both from a qualitative and a quantitative perspective. Many multinational organizations move towards a decentralized service provision model between multiple specialized service providers on the business side combined with pressure to improve on cost efficiency through the centralization of management-, support- and back-office functions in shared service centers.

As cross-border intercompany service transactions have long been in the crosshairs of tax authorities around the globe, taxpayers are facing mounting challenges in their compliance processes documenting the arm’s length character of transfer prices applied for the provision of intercompany services.

In order to aid taxpayers, as part of its action plan against Base Erosion and Profit Shifting (“BEPS”) the OECD has introduced an elective simplified approach to define service fees levied between related parties for the provision of low-value-adding intragroup services. With the application of this simplified approach, taxpayers can significantly decrease the compliance efforts necessary to demonstrate the arm’s length character of the Transfer Pricing mechanisms applied for qualifying intragroup services.

Qualification of services under the simplified approach

Under a relatively narrow definition, the OECD Guidelines (OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017) provide a catalogue of examples for activities that may qualify for the application of the simplified approach, e.g. accounting and audit activities, human resource activities, IT or general services of administrative support. This catalog is not of an exhaustive nature and leaves certain room for interpretation by the taxpayer.

In a similar fashion, the OECD guidance provides a catalogue of examples for activities that would typically not qualify for the application of the simplified approach. Activities comprise e.g. Research & Development, Manufacturing, Sales, Marketing and Distribution or Financial Services. Further, the activities of the group leadership may also be excluded from the application of the approach.

As a general rule, services may qualify as low value-adding under the OECD simplified approach if they:

  • are supportive by nature;
  • are not part of the core business of the group and do not contribute to economically significant activities;
  • do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles;
  • do not involve the assumption or control of substantial or significant risk for the party providing such services.

Application of the simplified approach in practice


From the outset, the conceptional implementation, maintenance and documentation of the simplified approach for the remuneration of low value-adding services appear relatively straightforward. It gives multinational groups the opportunity to centralize costs for support activities and charge them into the organization with a uniform, internationally accepted mark-up without the need for elaborate benchmarking studies to support the Transfer Pricing mechanism.

In practice, services for which the simplified approach is chosen by taxpayers typically comprise a large bundle of intragroup services, combining a variety of activities carried out by a shared service center or the group’s headquarter, which often also covers indirect service provisions by other group entities, costs of which are centrally pooled.


While it is arguably tempting for taxpayers to apply the simplified approach comprehensively to the entire cost base of a central service provider, caution should be taken. The simplified approach generally decreases some of the TP documentation efforts required (e.g. in a potential relief from performing and maintaining appropriate benchmarking studies to substantiate the profit mark-ups applied) on the one side, but it adds further documentation requirements on the other side in analyzing all categories of services and the underlying cost base qualified by the taxpayer under the simplified approach and showcasing why they qualify for the application of the approach.

This presents taxpayers with challenges, as the qualification of an activity under the “low-value-adding” category according to the OECD guidance may very much depend on the multinational’s specific value chain. While from a central group perspective this can typically be done for the taxpayer’s facts and circumstances along the OECD’s guidelines, the adoption and implementation of the simplified approach and qualification requirements for the approach into national law may differ from country to country – and so might the standing practice of interpretation of local tax authorities on the definition of low-value-adding services.

Does the simplified approach really lead to a simplification?

The application of the simplified approach still requires the satisfaction of a benefit test for the service categories subsumed under the approach. The benefit test needs to showcase that the services provided lead to a benefit for the service recipient to stipulate a willingness to pay for services under arm’s length conditions. As the centralization of services typically results in a cost advantage in the procurement of services (economies of scale), the benefit test for low-value-adding services can often be satisfied for most central service categories. Nevertheless, the benefit(s) derived must be documented.

Further, the correct distinction of shareholder costs when charging central (management) services is crucial for the tax-deductibility of the service charges on the side of the service recipient. Given that the cost base subject to recharge under the simplified approach typically comprise a wide category of services with a varying degree of shareholder benefit, the underlying activities and shareholder cost portions should be carefully analyzed and documented. Therefore, the application of the simplified approach does not relieve the taxpayer from the associated compliance burden.

Given the increasing tax transparency of multinationals and the traditional designation of (management) service charges as a “low-hanging-fruit” in local TP audits, service transactions are routinely challenged by tax authorities. Therefore, it is likely that service charges that are priced and documented by taxpayers under the simplified approach will continue to be scrutinized by tax authorities upon audit. Although the approach allows for a simplified documentation, adequate and reliable documentation of the services rendered is therefore still required. This means groups must keep record of e-mails, meeting summaries and other documents to prove that services have actually been provided, provide a benefit to the recipients and are non-duplicative. Further, the appropriateness of the cost base for the service charge (i.e. with respect to the treatment of shareholder costs) and the allocation keys used needs to be documented.

Finally, when applying a flat 5% profit mark-up on costs for low-value-adding services under the simplified approach, taxpayers should keep the overall Transfer Pricing structure within their organizations in mind, especially with respect to a clear differentiation between the Transfer Pricing mechanism applied for low- vs. high-value adding services. Especially mark-ups applied on costs for high-value adding services are often set and adjusted based on benchmarking studies, which might lead to a situation in which the (benchmarked) mark-up for high-value-adding activities is close or even below the flat 5% mark-up applied for low-value adding activities within the organization.


The application of the simplified approach does not generally lead to a lower compliance burden for taxpayers, especially for Swiss headquartered multinationals with a traditionally significant amount of cross-border intercompany service transactions. A detailed analysis of the activities performed should be carried out when categorizing low value-adding services under the OECD’s simplified approach and careful documentation of these service charges is still required in order to be ready for challenges by tax authorities that are to be expected.

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