Introduction
This article addresses intra-group services—activities performed by one or more Group members that benefit others within the group—and whether they are priced according to the Arm’s Length Principle.
Just as independent entities may source services externally or perform them in-house, Multinational Enterprises (MNE) group members may obtain services from third parties, other group entities, or internally. These services can range from externally available ones (e.g., Software Development or Marketing Support) to internal functions (e.g., HR or internal audit).
To ensure compliance, two key considerations must be assessed:
- Whether the intra-group service was actually provided; and
- Whether the service charge reflects an arm’s length price.
Determining whether an intra-group service has been rendered
Under the Arm’s Length Principle, an intra-group service is considered rendered if it provides economic or commercial value to the recipient, helping to enhance or maintain its business position. This can be assessed using several key factors:
- Whether an independent party would be willing to pay for the activity or perform it themselves under similar circumstances.
- Whether the recipient reasonably expects to benefit from the activity, even if the benefit doesn’t ultimately materialize.
- Whether the activity is commercially necessary and would justify payment by an independent party.
- Whether the benefits are identifiable and measurable—if not, the activity may not qualify as a service.
Duplication of Services
Duplication arises when a Related Party provides a service already performed by the recipient or an independent provider on their behalf. In such cases, there’s typically no commercial necessity, and no service is deemed provided under the benefit test.
However, certain exceptions may apply:
- Temporary duplication during group reorganizations (e.g., centralizing functions).
- Duplication to mitigate risk, such as seeking a second opinion for critical decisions.
To assess duplication, it’s important to examine the specific nature and purpose of the services. Not all similar activities are duplicative—for instance, local and global marketing efforts may serve distinct functions.
The FTA requires a clear justification for any apparent duplication of costs, and Taxable Persons must maintain thorough documentation to support such positions.
Understand the mandatory disclosure requirements around intra group services by referring to the UAE Transfer Pricing Disclosure Form.
Incidental Benefits
In some cases, intra-group services intended for specific Group members may incidentally benefit others. For example, studies on group restructuring or new business opportunities may be commissioned by certain entities but later shared with others for reference.
While these secondary recipients may gain useful insights, such incidental benefits do not qualify as intra-group services. Since the activities were not intended for them and an independent party wouldn’t typically pay for such access, no charge should be raised. Each situation, however, should be assessed based on its specific facts and circumstances.
Determining the arm’s length charge for intra-group services
- Comparability Analysis
To determine the Arm’s Length Price for intra-group services, both the service provider’s and recipient’s perspectives must be considered. The analysis should assess the value of the service to the recipient, what a comparable independent entity would pay in similar circumstances, and the costs incurred by the service provider.
- Selecting the Appropriate Transfer Pricing Method
The arm’s length charge for intra-group services should be determined based on the suitability of the methods. Commonly used methods include the Comparable Uncontrolled Price (CUP) method and cost-based methods such as the Cost Plus Method or the Transactional Net Margin Method (TNMM) with a cost-based profit indicator. The CUP method is preferred when comparable services exist between independent parties or are provided by the Related Party to third parties under similar conditions.
Explore how intra group services play a crucial role in the broader transfer pricing landscape and the shift toward compliance-focused tax startegies.
- Direct and Indirect Charge Methods
MNE Groups may use the direct charge method when services are also provided to independent parties in a comparable and significant manner, allowing for clear tracking of costs and pricing. However, when services benefit multiple group entities simultaneously—such as centralised management functions—direct charging may not be practical.
In such cases, indirect charge methods involving cost allocation and apportionment may be used, provided they reflect actual or expected benefits, follow sound accounting principles, and include safeguards against manipulation. However, indirect methods are generally unsuitable for core business services or those also rendered to third parties.
- Determining the Cost Base
When using a cost-based method, the cost base must be carefully defined. The process includes:
- Aggregating direct, indirect, and relevant operating costs for each category of centralised services across the Group.
- Excluding costs related to in-house or shareholder activities that benefit only the performing entity.
- Removing costs for services provided solely between two Group members, as these should be directly charged.
- Allocating the remaining pooled costs among benefiting entities using appropriate and consistently applied allocation keys (e.g., headcount for HR services, user count for IT).
Learn how intra group services are impacted when operating under a UAE tax group and the associated benefits.
- Arm’s Length Mark-Up and Simplified Approach
Service providers must apply a mark-up on all non-pass-through costs based on comparable data. To ease compliance, a simplified method allows a 5% cost-plus mark-up for certain low value-adding intra-group services—those that are supportive, not part of the core business, don’t use or create valuable intangibles, and involve minimal risk. Core business functions and high-value services like R&D, production, marketing, finance, or senior management are excluded from this safe harbour.
How BCL Globiz helps?
Effectively managing intra-group services under the Arm’s Length Principle is critical for ensuring transfer pricing compliance and minimizing tax risks. Proper identification, valuation, and documentation of these services—whether direct or indirect—are essential to reflect true economic substance and avoid disputes. Applying appropriate transfer pricing methods, carefully determining cost bases, and leveraging simplified mark-up approaches for low value-adding services can streamline compliance without compromising accuracy. At BCL Globiz, we guide businesses in structuring and pricing intra-group services to meet regulatory expectations, maintain clear rationale for service charges, and support transparent, defensible transfer pricing policies that align with the UAE’s tax framework.
For further assistance, reach out to our expert rakesh@bclglobiz.com and check out our website www.bcl.ae.
