Mr Edwin Leow
Director, Head of Tax
Mr Vincent Pang
When most people think about related party transactions, the first thought that comes to mind is whether the pricing of the transaction is at arm’s length. However, for intercompany services, the first actual step to look at is whether the services have been rendered. It is only after the services can be said to have been rendered that the focus will then move on to whether the pricing of the transaction is at arm’s length.
In this article, we will look at the first step, namely whether tax authorities will consider the services to have been rendered.
Whether services have been rendered or not is a question of fact. To determine whether the services have been rendered, the IRAS focuses on the benefits test which takes the following factors into consideration:
a. Whether activities are performed for another party which receives, or reasonably expects to receive, benefits from such activities. If so, there is a service provided even if the expected benefits do not eventually materialise;
b. Whether objectively there is any commercial or practical necessity for the activities to be performed for the service recipient and an independent party would be willing to pay the service provider for the performance of those activities. If not, the benefit is too remote and there is no service provided;
c. Whether the benefits have economic or commercial value such that an independent party would expect to pay to receive the benefits or be paid for providing the benefits. If not, there is no service provided; and
d. Whether the benefits are identifiable and capable of being valued. In other words, the benefits must be sufficiently direct and substantial. Otherwise, there is no service provided.
Apart from the benefits test which the IRAS focuses on, the OECD guidelines also take the following factors into consideration:
1. Shareholder activities – these activities relate to activities which a company performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as a shareholder. The following are examples of costs associated with shareholder activities:
a. Costs relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent; and
b. Costs relating to reporting requirements (including financial reporting and audit) of the parent company.
2. Duplication – no intra-group service should be for activities undertaken by one group member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party.
3. Incidental benefits – there are some cases where an intra-group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. The incidental benefits ordinarily would not cause these other group members to be treated as receiving an intra-group service because the activities producing the benefits would not be ones for which an independent enterprise ordinarily would be willing to pay.
It is crucial that this first step is taken to establish that services have indeed been rendered to the group members. The above mentioned are but a brief summary of the general guidelines – there are intricacies involved which would change depending on your company’s situation. If you would like our assistance on tax services, please reach out to us. We look forward to hearing from you!
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