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No mark-up for pass-through services

by Verbena Caravella | Jun 29, 2021 | Blog

Do you know what low value added services are in the context of transfer pricing regulation?

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereinafter “Guidelines”) published in July 2017 define as “low value added services” those activities performed by one or more entities belonging to a multinational group for the benefit  of the associated companies if they are of a supportive nature, are not  part of the  core business of the group and do not require the use of unique intangible assets or the assumption or control of significant risk for the service provider.

The “simplified approach” for the remuneration of low value added services

Paragraph 7.49 of the OECD Guidelines, whose e contents have been implemented by the Italian law in Article 7 of the MEF (“Ministry of Economy and Finance”) Decree of May 14, 2018, states that the  taxpayer should remunerate the  low value-added services by applying the criterion based on the cost plus mark-up..In these cases, the compliance with the arm’s length principle is matched e if the  service provider recharges to the beneficiary entity(ies) the costs incurred for the performance of such activities plus a mark up that must not exceed  the percentage of 5%. The simplified approach relieves the taxpayer from the duty to  perform  a specific benchmark analysis to support the mark up applied.




How to value intra-group chargebacks “at cost” without applying mark-ups?

The transfer pricing guiding principle, that represents  the pillar  of the  best practice set forth within the Guidelines, is that the economic conditions made between related parties  in their intra-group transactions must be the same that would be agreed  between independent parties carrying out comparable operations. This principle is set forth in Article 9 of the OECD Model Convention against double taxation and, from a domestic perspective, in Article 110, paragraph 7 of the Italian Income Tax Act (TUIR). Moreover, under certain circumstances  the related entity playing as service provider – mainly -the group holdings – may adopt transfer pricing policies based on the costs charge-back without the application of any mark-up. The Guidelines do not address this case, leaving the way open to different interpretations. The consequence, from an operational point of view, is the risk that, inthe event of a tax audit, the tax authorities may challenge the taxpayer for the application of a transfer pricing policy that does not comply with the arm’s length principle, in particular if the Italian company operates within the intra-group transaction as service provider. In this case, the recharging to the service recipient entities of the costs without the application of a mark-up could be qualified by the tax auditors as an operation aimed at recording in Italy a lower level of profit, by implementing a  base erosion action. This could definitively lead to a transfer pricing adjustment  pursuant to Article 110, paragraph 7 and the payment of the taxes on the higher tax base assessed.

Clarification by the Lombardy Regional Tax Commission (judgment 1373/3/2021)

The  Regional Tax Commission of Lombardy recently issued a decision in favour of the taxpayer, reforming the decision of the first instance Commission who initially confirmed the correctness of the  tax assessment issued by the Revenue Agency on the basis of the breach of Article 110(7). In this case, the Italian company provided services to related entities by recharging the costs incurred for the purchase of such services from third independent providers (, without applying any mark-up percentage for the intermediation activity carried out in favour of the foreign beneficiary companies. The Commission pointed out that services provided indirectly – i.e. engaging third-party providers – should be qualified as activities that generate pass-through costs,  therefore they are outside the perimeter of transfer pricing rules. Consequently, the chargeback of the “cost” by the Italian company does not constitute a policy in contrast with the arm’s length principle set forth by Article 110, paragraph 7, resulting ultimately unfounded the findings raised by the tax auditors.

Concluding remarks

With regard to “non-intermediated” services, i.e., the services provided directly by a group company through the use of its own (human and material) resources, no clarification has yet been provided with respect to the circumstances that might justify the chargeback of costs without mark-up. Generally speaking, if it is true that an independent company would require an adequate remuneration for the provision of services, it is also necessary to take into account particular conditions that could influence the group strategiesand could  be justified by   non-fiscal reasons. In particular, reference is made to the economic difficulties that one or more entities belonging to the group may have experienced during the Covid-19 period and to the policies undertaken by the holding entities to mitigate the effects of the negative economic cycle, which could include the suspension, at least temporarily, of the application of the mark-up on costs for intercompany services.



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