The application of the simplified approach still requires the satisfaction of a benefit test for the service categories subsumed under the approach. The benefit test needs to showcase that the services provided lead to a benefit for the service recipient to stipulate a willingness to pay for services under arm’s length conditions. As the centralization of services typically results in a cost advantage in the procurement of services (economies of scale), the benefit test for low-value-adding services can often be satisfied for most central service categories. Nevertheless, the benefit(s) derived must be documented.
Further, the correct distinction of shareholder costs when charging central (management) services is crucial for the tax-deductibility of the service charges on the side of the service recipient. Given that the cost base subject to recharge under the simplified approach typically comprise a wide category of services with a varying degree of shareholder benefit, the underlying activities and shareholder cost portions should be carefully analyzed and documented. Therefore, the application of the simplified approach does not relieve the taxpayer from the associated compliance burden.
Given the increasing tax transparency of multinationals and the traditional designation of (management) service charges as a “low-hanging-fruit” in local TP audits, service transactions are routinely challenged by tax authorities. Therefore, it is likely that service charges that are priced and documented by taxpayers under the simplified approach will continue to be scrutinized by tax authorities upon audit. Although the approach allows for a simplified documentation, adequate and reliable documentation of the services rendered is therefore still required. This means groups must keep record of e-mails, meeting summaries and other documents to prove that services have actually been provided, provide a benefit to the recipients and are non-duplicative. Further, the appropriateness of the cost base for the service charge (i.e. with respect to the treatment of shareholder costs) and the allocation keys used needs to be documented.
Finally, when applying a flat 5% profit mark-up on costs for low-value-adding services under the simplified approach, taxpayers should keep the overall Transfer Pricing structure within their organizations in mind, especially with respect to a clear differentiation between the Transfer Pricing mechanism applied for low- vs. high-value adding services. Especially mark-ups applied on costs for high-value adding services are often set and adjusted based on benchmarking studies, which might lead to a situation in which the (benchmarked) mark-up for high-value-adding activities is close or even below the flat 5% mark-up applied for low-value adding activities within the organization.