TP Documentation for Intercompany Services [2025]: LVAS to High-Value

Quick Answer: What Makes Strong Services Documentation?

Documenting intercompany services requires demonstrating four elements: (1) services were actually rendered, (2) they provide real benefit to the recipient, (3) the charge is arm's length, and (4) appropriate cost allocation methods are applied. For low-value-adding services (LVAS), the OECD's simplified approach uses a fixed cost + 5% markup, reducing the need for detailed benchmarking—though adoption varies by jurisdiction. For high-value services—R&D, strategic management, specialized technical work—full arm's-length pricing and robust documentation are required.

The benefit test is foundational: ask whether an independent party in comparable circumstances would pay for the service. If the answer is no—because the activity merely duplicates what the recipient already does or benefits only the parent as shareholder—the charge fails the arm's length standard.

---

The Benefit Test: Did the Service Provide Value?

OECD Framework

Under OECD Guidelines ¶7.6, an intra-group service is recognized only if it provides independent value to the recipient. The key question: would a stand-alone company in the same situation pay for this service—or perform it internally?

The activity must enhance or maintain the recipient's business position. If no independent party would pay for it, "the activity ordinarily should not be considered an intra-group service" (OECD ¶7.6).

Examples of services meeting the benefit test:

• Routine equipment repairs performed by one affiliate for another
• Centralized IT support that reduces costs for subsidiaries
• Legal advice on local contract negotiations
• Technical support improving production efficiency

Examples failing the benefit test:

• Duplicative services already performed locally
• Activities benefiting only the parent company
• Purely "stewardship" oversight without operational value
• Incidental benefits from group membership

US Treasury Regulations

US Reg. §1.482-9(l)(3) sets out the benefit test for controlled services transactions. The IRS may allocate income to reflect arm's-length charges for services that benefit members of the controlled group. Key principles:

• Allocations must align with reasonably anticipated benefits based on facts known when services were rendered
• Charges are arm's length even if anticipated benefits don't materialize—the expectation of benefit must be reasonable at the time
• No allocation is made if expected benefits are "so indirect or remote" that an unaffiliated party wouldn't pay
• Duplicative services explicitly do not provide benefit under §1.482-9(l)(3)(iii)

---

Low-Value-Adding Services (LVAS): The Simplified Approach

What Qualifies as LVAS?

The OECD provides an elective simplified approach for pricing routine, supportive intra-group services (OECD ¶7.45-7.65). This approach reduces compliance burdens but is subject to local country acceptance and specific qualifying conditions. LVAS are services that are:

1. Supportive in nature—not core to the group's profit-earning activities
2. Not involving unique intangibles or proprietary technology
3. Not assuming significant business risk
4. Widely available from third-party providers

Qualifying Service Examples

Services Excluded from LVAS

The simplified approach explicitly excludes services that are core or value-creating:

The 5% Markup Methodology

For qualifying LVAS under the OECD simplified approach, the arm's-length charge is determined by:

1. Pooling relevant costs for each service category (excluding pass-through costs)
2. Applying a fixed 5% markup on the cost pool
3. Allocating to beneficiaries using an appropriate allocation key

The 5% markup is specified by the OECD—detailed benchmarking is not required to justify it, though local country acceptance of the approach varies.

LVAS Documentation Requirements

Though simplified, documentation is still required:

LVAS by Jurisdiction: Key Variations

Adoption of the OECD's simplified approach varies significantly. Always verify current local rules:

---

High-Value Services: Full Documentation Required

Services that don't qualify for the LVAS simplified approach require comprehensive documentation and full arm's-length analysis—often including benchmarking, unless reliable CUP or other direct pricing evidence exists.

What Are High-Value Services?

• Management services (strategy, planning, decision support)
• R&D and product development
• Specialized technical work (engineering, specialized IT development)
• Marketing strategy and branding
• Treasury and risk management
• Complex legal or regulatory services

Documentation Requirements

For high-value services, documentation must include:

1. Detailed Service Description

• Specific activities performed
• Hours/resources devoted
• Deliverables provided
• Time period covered

2. Functional Analysis

• Skills and expertise of service provider employees
• Assets used (technology, know-how)
• Risks assumed

3. Benefit Demonstration

• How service improved recipient's position
• Quantifiable impact where possible
• Why recipient would have paid for this independently

4. Pricing Methodology

• Method selected (CUP, Cost Plus, TNMM)
• Benchmarking analysis if applicable
• Comparable data sources

5. Supporting Evidence

• Time sheets and project reports
• Internal correspondence
• Approval documents

Pricing Methods for High-Value Services

---

Management Fees vs. Shareholder (Stewardship) Costs

Critical Distinction

This is one of the most scrutinized areas in transfer pricing. The OECD requires distinguishing between:

What Are Shareholder Activities?

Shareholder activities are undertaken by a parent "solely because of its ownership interest" (OECD ¶7.9). These costs generally must be borne by the shareholder—not charged to subsidiaries. Dual-benefit situations (where an activity benefits both shareholder and subsidiary) require careful delineation.

Examples of non-chargeable shareholder costs:

• Board meetings and director compensation
• AGM organization and shareholder reporting
• Investor relations for parent's shares
• Consolidated financial reporting for the group
• Parent entity's legal/audit costs for maintaining corporate structure
• Costs "ancillary to corporate governance"
• Strategic planning that benefits only the parent's investment portfolio

What Are Chargeable Management Services?

Activities performed for operational benefit to subsidiaries are chargeable:

• Strategic advice specific to subsidiary's market
• Marketing support for subsidiary's products
• HR policy development used by subsidiaries
• Technical support improving subsidiary operations
• Training programs for subsidiary employees

Special Considerations: India

Indian tax authorities are particularly strict on management service charges:

• Parent-level services are often disallowed if seen as duplicative of local management capabilities
• AMP (advertising, marketing, promotion) expenses are a separate, heavily litigated controversy—distinct from services but often conflated (see Sony Ericsson and related Delhi High Court decisions)
• Only activities creating clear, documentable value for the Indian subsidiary are accepted
• "Group synergy" benefits (e.g., credit rating uplift from group membership) are generally not chargeable as services

---

Cost Allocation Methods

When one service provider supplies multiple group members, costs must be allocated objectively.

Allocation Approaches

Common Allocation Keys

Documentation Requirements for Allocation

• Rationale: Explain why the chosen key reflects actual benefit
• Consistency: Use the same key year-to-year unless business facts change
• Calculations: Show detailed workings of allocation
• Data Sources: Identify where allocation data comes from

---

Service Agreements: Recommended Structure

Formal service agreements are strongly recommended to support intercompany charges—though their absence is not automatically fatal (EU JTPF guidance notes written agreements may not always be available and shouldn't be the sole deciding factor). Ensure consistency between any agreements and actual conduct. Structure agreements to include:

Required Elements

Best Practices

• Execute agreements before or at the time services begin
• Annual review to confirm terms remain appropriate
• Align agreement terms with actual practice
• Include deliverables (reports, support levels) where measurable
• Maintain copies with Local File documentation

---

Common Documentation Mistakes

Mistake 1: No Benefit Support

Problem: Charging fees without justification that the service benefited the recipient—e.g., billing for "management" with no documented input.

Fix: Document specific services provided, hours spent, and how the recipient's position improved.

Mistake 2: Including Shareholder Costs

Problem: Billing group governance or supervisory costs (AGM, investor relations, consolidated reporting) to operating units.

Fix: Identify and exclude shareholder activities; only charge for services with operational benefit.

Mistake 3: Misclassifying Services as LVAS

Problem: Applying the 5% simplified approach markup to R&D, strategic consulting, or finance functions.

Fix: Carefully verify each service category meets LVAS criteria before applying the simplified approach.

Mistake 4: Poor Allocation Rationale

Problem: Choosing allocation keys arbitrarily or switching them year-to-year.

Fix: Document why each key reflects benefit; maintain consistency.

Mistake 5: Inconsistent Cost Pools

Problem: Including/excluding different costs each year without explanation.

Fix: Maintain stable cost pool definitions; document any changes with rationale.

Mistake 6: Lack of Agreements

Problem: No formal contract or internal memo to evidence service arrangements.

Fix: Implement written agreements for all material service arrangements.

Mistake 7: Duplicative Services

Problem: Charging for services the recipient already performs internally.

Fix: Document what the recipient would otherwise do; demonstrate incremental value.

Mistake 8: Parent-Only Overhead

Problem: Allocating headquarters costs broadly without attribution to benefiting subsidiaries.

Fix: Trace each cost to actual support of subsidiaries; exclude parent-only costs.

---

Audit Defense: What Tax Authorities Focus On

Key Audit Triggers for Services

Services documentation draws heightened scrutiny because intercompany service charges are often perceived as easy avenues for profit shifting. Tax authorities commonly focus on:

• High management fee ratios: Service charges that consume a large portion of the recipient's profits
• Year-over-year increases: Sudden jumps in service charges without corresponding business changes
• Loss-making recipients: Subsidiaries paying fees while generating losses
• Charges to low-tax jurisdictions: Services flowing to entities in favorable tax environments
• Inconsistent methodologies: Different pricing approaches for similar services across the group

What Auditors Request

During a services-focused examination, expect requests for:

1. Detailed service descriptions: What exactly was provided, by whom, when
2. Time records and deliverables: Evidence that services were actually rendered
3. Benefit documentation: How the recipient used and gained from the services
4. Cost pool composition: Breakdown of what's included and excluded from allocations
5. Allocation key support: Data underlying headcount, revenue, or usage-based allocations
6. Intercompany agreements: Contemporaneous contracts specifying terms

Strengthening Your Position

To withstand audit scrutiny:

Document proactively: Don't wait for an audit to assemble evidence of service rendition and benefit. Maintain time records, deliverable logs, and correspondence contemporaneously.

Quantify where possible: "Marketing support increased subsidiary sales by 15%" is stronger than "provided valuable marketing assistance."

Maintain consistency: Apply the same methodology year-to-year. Unexplained changes invite questions.

Separate shareholder costs clearly: Demonstrate that governance costs are excluded before any allocation occurs.

---

Practical Examples

Example A: LVAS (Routine IT Support)

Scenario: European IT center provides helpdesk support to subsidiaries in Germany, UK, and France.

Documentation:

Documentation includes: Service category list with LVAS justification, allocation key rationale, cost pool breakdown, and 5% markup calculations.

Example B: High-Value Management Services

Scenario: US parent provides strategic planning and financial management to Asian subsidiaries.

Documentation:

Example C: Shared Services Center

Scenario: SSC handles accounting, procurement, and HR for three subsidiaries.

Documentation:

Allocation example: Subsidiary A has 50% of purchase orders → bears 50% of procurement costs ($300,000 + 5% = $315,000).

---

Related Topics

Documentation Guides:

• Transfer Pricing Documentation Guide — Complete documentation hub
• Local File Best Practices — Entity-level documentation
• Master File Best Practices — Global overview requirements
• Contemporaneous Documentation Requirements — Timing and penalty protection

Benchmarking Resources:

• Complete Benchmarking Study Guide — Full methodology
• PLI Selection Guide — Choosing the right profit indicator

Glossary:

• Functional Analysis — FAR framework
• Arm's Length Principle — Core concept
• Safe Harbor — Simplified approaches
• TNMM — Transactional net margin method

---

Frequently Asked Questions

What is the benefit test for intercompany services?

The benefit test asks whether a service provides real economic or commercial value to the recipient. It is met if an independent party, in comparable circumstances, would have paid for (or performed) the same service. If the recipient gains no benefit that a standalone firm would pay for, the charge is not arm's length. Both OECD Guidelines (¶7.6) and US Reg. §1.482-9(l)(3) apply this test—US rules specifically address indirect/remote benefits and duplicative services. Key documentation: show what service was provided, who needed it, and why it enhanced the recipient's business position.

What is the LVAS simplified approach and when can I use it?

The LVAS (Low-Value-Adding Services) simplified approach is an OECD-endorsed method for pricing routine support services with reduced compliance burden. To qualify, services must be: supportive in nature, not core to the group's profit-earning activities, not involving unique intangibles, and not assuming significant risk. Qualifying services use a fixed 5% markup on costs, reducing the need for detailed benchmarking. Use it for basic accounting, payroll, HR administration, IT helpdesk, and general admin. You cannot use LVAS for R&D, marketing, treasury, manufacturing, or senior management functions. Important: Local country acceptance of the simplified approach varies—verify before applying.

What's the difference between management services and shareholder costs?

Management services are corporate support functions benefiting subsidiary operations—strategic advice, marketing support, HR policies—and should be charged at arm's length. Shareholder activities are undertaken solely because of ownership interest—board meetings, investor relations, consolidated reporting—and should not be charged to subsidiaries. The key test: if the activity benefits only the parent's ownership position (not the subsidiary's operations), it's a non-chargeable shareholder cost. Document which activities provide operational benefit versus ownership-related activities.

How do I document the allocation of service costs?

Describe each cost pool (what costs are included), explain your allocation key (headcount, revenue, usage), and show calculations for each recipient's share. Provide the data supporting the allocation (employee counts, revenue figures) and explain why the key reflects actual benefit received. Maintain consistency year-to-year—switching keys without documented rationale creates audit risk. For LVAS, include worksheets showing cost pool amounts, the 5% markup calculation, and allocation to each beneficiary.

What markup should I charge for intercompany services?

It depends on the service type and method. Under the OECD LVAS simplified approach, use the fixed 5% on costs. For high-value services, markups should be set by arm's-length analysis—benchmarking against comparable independent service providers, or using CUP if available. Markups vary significantly by service complexity, risk, and market; there's no universal "typical" range. In the US, the Services Cost Method (SCM) permits charging at cost (effectively 0% markup) for "covered services" meeting qualification rules, while complex/high-value services require standard arm's-length pricing. The key is demonstrating consistency with what independent providers would charge for similar services—document your methodology and supporting analysis.

Do I need a written agreement for intercompany services?

Strongly recommended, though not a universal legal requirement. A contemporaneous written agreement significantly strengthens arm's-length support. Include: parties and scope, pricing methodology, payment terms, and responsibilities. Tax authorities commonly expect formal agreements in practice, and their absence weakens credibility—though EU JTPF guidance notes that lack of written documentation shouldn't be automatically decisive. Oral arrangements or implied charges are weak evidence. Best practice: execute agreements before or at the time services begin, review annually, and ensure terms align with actual conduct.

Which services are excluded from LVAS treatment?

Per OECD ¶7.47, excluded services include: manufacturing/production, R&D and engineering, marketing/sales/distribution, purchasing of raw materials, finance and treasury operations, insurance underwriting, extraction/mining activities, and senior management functions beyond simple administrative support. These are excluded because they involve core business activities, unique intangibles, or significant risk—making the simplified approach inappropriate. For these services, use full arm's-length analysis, often including benchmarking unless reliable CUP or other pricing evidence exists.

How do I prove benefit for centralized services?

For group-level services (central IT, global marketing, shared procurement), document both present and anticipated benefits. Show how centralization: reduced costs compared to decentralized alternatives, improved efficiency (KPIs, metrics), or provided expertise the subsidiary couldn't maintain independently. Explain why independent companies would centralize similar functions. Use specific data—cost savings, headcount efficiencies, service level improvements. Under US law, even non-monetary benefits count if foreseeable at the time services were rendered. Maintain records (studies, board minutes) evidencing the centralization rationale.