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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: Types of transactions: Services: arm’s length price

What is the arm’s length price of a service?


Between independents, a complex interaction of commercial factors combine to determine the price for services (see INTM440060 for the scope of “services”). These factors might include:


  • The nature of the service
  • The costs of providing the service
  • The costs of an alternative
  • The expected benefit
  • The state of the market
  • The financial position of the provider or recipient.


The examples below give an indication of the possible criteria that might be used in different situations.


  1. A company provides services that are integral to the group’s business as a whole. For example a firm of civil engineers may have specialists in a particular field based in the UK.  The firm’s subsidiary in South Africa wins a contract to design and oversee the construction of a new power station.  The UK supplies specialist employees critical to the success of the project. A suitable method of valuation of the services provided by the UK might be an independent firm providing similar services.
  2. A group company provides services only to other group companies. For example a group   manufactures and sells electrical equipment. It established a subsidiary whose business is to provide legal, accountancy, human resources and IT services to all the group companies. A review of the facts might lead to the conclusion that this service provision falls within the scope of the guidance on centrally provided services at INTM440090, and so a cost-plus method can be applied.


In all enquiries, the facts must be established to identify the exact nature of the service, the functions and costs involved in supplying it and the extent of the benefit to the recipient. The arm’s length price would be influenced by all of these factors.


The costs themselves will consist of direct and indirect costs. The direct costs will include employee costs such as salaries, bonuses, pension provision, travel and subsistence costs, support costs such as secretaries, broadly costs that relate directly to the service being provided (which usually is the services provided by a person, or group of persons). Indirect costs will include for example office accommodation and a share of utilities and other overheads.


These costs would affect the price charged between independents.


When applying cost based methods such as cost-plus (see INTM421060), the OECD Transfer Pricing Guidelines (at paragraph 7.33) recommend that when looking at comparable transactions or independent companies supplying comparable services, differences in costs between the case under review and the comparables should be analysed. Adjustments to the cost base may be needed.


Where a group company has acted as an agent or intermediary in incurring expenditure on behalf of someone else, it may be appropriate to just recharge or pass-on such expenditure (known as ‘pass-through’ costs) without a profit margin (paragraph 7.34 of the Guidelines) and to apply a mark-up only to the costs incurred by the intermediary in performing its functions as intermediary or agent.