From a high level, business-to-business service fees may be levied across borders if the support benefits the business position of the recipient company. Services can include anything from technical services to back-office support, but there are some restrictions in U.S. and international transfer pricing rules that govern when fees are allowed. On the basis of judgments of the Court of Justice of the European Union (CJEU) in landmark VAT cases such as Field Fisher Waterhouse LLP (C-392/11) and Wojskowa Agencja Mieszkaniowa w Warszawie (C-42/14), such refills can be regarded as a mere ancillary service to the main service (i.e. the rental of immovable property) if certain conditions are met. In this regard, in the opinion of the CJEU, it is important, among other things, to examine whether the landlord can terminate the rental agreement if the tenant does not pay the incidental costs. If this is the case, it could be argued that ancillary costs are not independent of the rent of the property – rather, they should be considered a single delivery. Conversely, the court also concluded that if the lessee is free to choose his preferred supplier for the other supplies himself or if he has the right to enter into a contract directly with the supplier, this indicates that the supplements must be considered as a separate service from the rental of immovable property. Tax authorities around the world are certainly concerned that multinational companies are charging fees for intercompany services. Intercompany service fees reduce the amount of taxable income in the recipient country and increase the taxable profits of the company providing the services.
No wonder auditors keep a suspicious eye on management fee payments disclosed on a company`s tax return. Regardless of the solution used, transactions must be inventoried and classified by type and processed according to the standard procedure. Business-to-business transactions should also include automated transmission of approvals and dispute resolution. Centralized service fees and enterprise allocations must also follow standardized methods with standard calculations to ensure efficient and consistent processing. Intercompany service charges, in particular head office or management services (hereinafter referred to as „Headquarters Services“), are one of the most common transactions for multinational companies, but can also be one of the most difficult to defend. Benchmarking an arm`s length cost increase for this type of intercompany transaction is usually the easiest part; Supporting the cost base to which the markup is applied is often a more difficult task. Rule 1. Issue monthly intercompany invoices (not a single aggregated line at the end of the year). It is highly unlikely that the national tax administration will undoubtedly accept a „last day of the financial year“ intercompany invoice in the financial statements of a Japanese subsidiary or office with a one-line fee for „Intercompany management fees and top-ups“. This is especially a problem if the invoice almost cancels the taxable income of the Japanese company (minimum profit), accurately cancels (break-even point) or more than cancels (loss). There are Japanese accountants (会計士) and tax advisors (税理士) who take a „I`m not the client`s deputy manager, so I let them dig into an audit hole“ view and allow such an invoice in the final financial statements and tax returns.
Problems can then arise because part of a standard Japanese corporate tax return is a simple one-line summary of monthly expenses, in which an increase in expenses during 12 months can cause the national tax authority`s automated system to report the tax return for manual review. Three months later, when the national tax administration calls to start an audit, the same tax advisor will be happy to inform you that their fee for participating in tax audits is JPY 120,000 per day (or much more) plus excise tax. To avoid unnecessary review, intercompany management fees and top-ups should be billed monthly to the Japanese subsidiary or office. This is not tax avoidance advice, because if your company charges excessive intercompany management fees and charges its Japanese subsidiary or branch, the sophisticated algorithms of the National Tax Agency will always detect a potential problem and trigger a manual review, regardless of the distribution of costs throughout the fiscal year. If such an invoice for intercompany fees „last day of the financial year“ is justified by reasonable calculations of fees on market terms, the national tax authority will of course accept it, although an auditor can always call to validate the fees. The ideal arrangement between intercompany head office services consists of a few key elements, namely: A benefit that can be overlooked occurs when service fees impact the cash flow and taxable income position of each company within a multinational corporation. Service companies earn taxable income and receive money from affiliated subsidiaries. This injection of cash and income can help pay off debt and optimize effective tax rates within a company. The following examples illustrate this approach. On the other hand, the supplements also do not fall within the scope of VAT in the case of payments made by `B` in the name and on behalf of `C`, that is to say, where `B` purchases certain goods or services not under his own name, but in the name and on behalf of his customer (`C`) and then wishes to recover the costs by requesting reimbursement from `C`. Typically, business-to-business support services are remunerated on a cost-to-cost basis or a cost-plus method. Not all costs should be reimbursed.
There is no single formula. Considerable discretion is exercised in the drafting of these agreements. Obviously, materiality is a factor, while a transfer pricing study may be warranted for a seven-figure annual management fee, it would not apply to a $50,000 management fee. Your tax advisor knows this and can advise you on best practices for your industry and situation. Contact us if you have any questions. These questions are by no means exhaustive, but if the short answer to all this is no, it can be difficult to support an increase in service fees for headquarters. As the financial situation of service recipients becomes increasingly uncertain, increasing fees for all recipients without sound economic justification will undoubtedly increase transfer pricing risk. Tax risks arise from the implementation of a service debit system, especially during the initial implementation. Tax authorities may and regularly prohibit deductions for cross-border service charges. When a company is unable to prove the benefits of the services provided or the amount charged, taxpayers face an uphill battle to appeal. While a multinational can provide evidence to defend its position during an audit, these documents are often dismissed as inadequate if collected long after the fee has been paid. Intercompany reconciliation can lead to a bottleneck in closing the books of a parent company, so it is important to streamline the intercompany process as much as possible.
First of all, it should be noted that some supplements could be completely neutral in terms of VAT due to the legal status of the undertakings concerned. For example, if a fee is charged from a registered office to its branch (or vice versa), the transaction would normally remain outside the scope of VAT. This is due to the fact that the registered office and the branch constitute a single legal person and, therefore, all transactions between the two are purely internal in nature and do not involve VAT. Indeed, it is like taking money from one pocket and putting it in another. If a company pays employees` salaries and then reimburses part of it to another company, you usually don`t have to add VAT to the cross-charge. Allocation systems similar central services such as central services and management fees, but with different allocation keys (i.e. As a result of globalization, industry consolidation and increasingly complex multinational value chains, more and more companies are facing costly intercompany accounting problems. It is also important to distinguish between management fees and payments for the use of intangible assets. The provision of business know-how, processes, customer lists or other intangible assets can be considered as an outward transfer of intangible assets for which royalties are due and which are often subject to withholding tax. Intercompany services are an essential part of multinationals` day-to-day global operations, but the impact on cash management and efficient tax rates can be a significant bonus. Given the increasing scrutiny of transfer pricing issues, all multinational taxpayers should be prepared to explain how services are provided across borders. Investing in technology to streamline the business-to-business accounting process is worth it as the accuracy of financial reporting improves.
With a master data management program, new and acquired accounts are configured to follow guidelines, and all intercompany transactions are processed using the same standardized method. This includes the use of technology solutions to integrate the flow of transactions between platforms and control activities across multiple ERP systems. If a company bears the cost of an expense and recalculates it to another company in full and in the exact amount of the invoice, it is not necessary to add VAT to the interinstitutional fee, as this is a payment. Developing a cash management strategy will help you reduce bank fees and the amount of money left in interest-free accounts. There is also information that allows the organization to hedge currencies effectively. In some situations, the determination of an arm`s length price has been changed, and companies are now required to say even more about their intercompany transactions and financial results […].