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HMRC internal manual

International Manual

Transfer Pricing: Types of transactions: Services: Low Value-Adding Services

What are ‘Low Value-adding Services’?


Certain intra-group services are likely to be very low in value and consequently, from a risk assessment perspective, do not warrant a substantial application of resources.


Consequently, a simplified approach is suggested in the Guidelines to the transfer pricing of transactions involving such “low value-adding intra-group services” (“L.V.A.S.”) which are defined at paragraph 7.45 of the Guidelines as services performed by one member or more than one member of an MNE group on behalf of one or more other group members which:


  • are of a supportive nature
  • are not part of the core business of the MNE group (i.e. not creating the profit-earning activities or contributing to economically significant activities of the MNE group)
  • do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles, and
  • do not involve the assumption or control of substantial or significant risk by the service provider and do not give rise to the creation of significant risk for the service provider.


The Guidelines give examples of activities which:

  • would not qualify  for the simplified approach (paragraph 7.47), and
  • are likely, subject to the specific facts and circumstances, to qualify for the simplified approach (paragraph 7.49)


If similar services are supplied in comparable circumstances by a member of an MNE group to both associated enterprises and to independent third parties there would then be a readily available comparable uncontrolled transaction and the simplified approach would be unnecessary (as there would be no substantial allocation of resources required) and should not be applied.


The Simplified Approach for Low Value-adding Services


The simplified approach that MNE groups can choose to take in respect of qualifying low value-adding intra-group services is detailed in paragraphs 7.52 to 7.64 of the Guidelines.


Simplified Approach: Preliminary actions and requirements


Where the simplified approach is adopted it should be applied, as far as is possible and practicable, consistently on a group-wide basis.


The group should maintain documentation detailing:


  • the nature of each category of low value-adding intra group services and why they are believed to fall within the definition
  • the benefits believed to be received by the recipients of those services
  • the allocation keys adopted for each category of low value-adding services and the reasons they are believed to be appropriate
  • relevant contracts between the parties
  • calculations of the charges made by or to relevant group members in accordance with the process as detailed below


Simplified Approach: Process


Initial Step: Calculate and pool the annual costs incurred by all relevant group members in performing each category of low value-adding intra-group services.


Relevant costs will include both indirect and direct costs including the appropriate part of the operating expenses of the company(ies) providing the services and any relevant “pass-through” costs.


Second Step: Costs attributable to the provision of services by one group member to a single other group member should be removed from the pool. This will leave a pool of costs incurred in the provision of low value-adding services to multiple group members.


Third Step: Appropriate allocation keys should be used to allocate the costs within the pool relating to each category of low value-adding services amongst the recipients of those services.


The appropriate allocation key or keys will depend upon the nature of the services and should reflect the underlying need of the recipient for the category of services in question and the level of benefit it expects to receive from them.

The same allocation key or keys should be used on a consistent basis for all allocations of costs relating to the same category of services. Depending upon the nature of the services, appropriate allocation keys might be, for example, the recipient’s share of total staff headcount, assets, turnover, or relevant transactions of users of the service.


Calculation of charge to group member receiving low value-adding intra-group services


The charge to each group member receiving low value-adding group services is the sum of:

  1. the costs incurred by another group member in providing low value-adding services only to that member removed from the pool under the second step plus a  mark-up of 5% on those costs to the extent that they are not ‘pass-through’ costs (see INTM440070), plus
  2. the share of pooled costs allocated to the member under the third step using the selected allocation key, plus a  mark-up of 5% on those costs to the extent that they are not ‘pass-through’ costs (see INTM440070).


Calculation of profits of group member providing low value-adding intra-group services


The amount payable to each group member providing low value-adding group services is the sum of:

  1. the charge made as described in (1) above to another group member in respect of low value-adding services provided by it only to that group member, plus
  2. a share of the charge made to other group members under (2) above in respect of each category of low value-adding services, calculated by reference to the proportion of the total relevant costs it incurs compared to the total relevant costs incurred by all group members in providing those services.