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HMRC internal manual

International Manual

Transfer Pricing: Transactions and Structures: business structures: services

Service providers

The OECD Transfer Pricing Guidelines give an example of a company providing services suitable for reward by way of the cost plus method. However, case teams should scrutinise carefully any claims that a company is a provider of a low level service which would be entitled to a low arm’s length reward calculated by reference to a cost plus on all costs to give a net margin, particularly where the group’s business as a whole revolves around the provision of services (or such provision plays a large part of the business), rather than the sale of goods. For example:

  • Provision of business information.
  • IT consultancy.
  • Engineering consultancy firms.
  • Employment agencies.

The provision of such services may involve access to, or use of valuable intangible rights and/or highly paid personnel may contribute in important ways to the provision of services. A service which is in fact critical to the overall trade is different to a service which is incidental to or arises as a consequence of a trade. An arm’s length reward would reflect this.

Some countries offer tax incentives for companies carrying out services. Cases may be encountered where, for example, call centres have been established outside the UK. Such cases might also be influenced by cost considerations (such as wages) other than tax.

However, case teams should be alert to any arrangements that seek to move the provision of services out of the UK, while the personnel and infrastructure stay in the UK, or where the contracts for services are said to made outside of the UK while evidence points to significant UK company involvement in obtaining those contracts (and the UK company receives only a routine reward).