Comments on the OECD Consultation Draft for Chapter VII — Intra-Group Services
About these technical comments
The following reproduces Evident Solutions' submission to the OECD Public Consultation on the proposed revisions to Chapter VII of the OECD Transfer Pricing Guidelines (Intra-Group Services). The submission was intentionally drafted so that each section could stand on its own as commentary on a particular aspect of the Discussion Draft. At the same time, recurring themes—including business strategy, enterprise risk management, modern operating models, and practical administration—are developed across multiple sections to present a consistent overall perspective.
Overview & Perspective
Evident Solutions welcomes the OECD’s continued efforts to modernize Chapter VII of the Transfer Pricing Guidelines. The Consultation Draft provides a more comprehensive analytical framework for evaluating intra-group services and reflects a meaningful effort to clarify concepts that have generated controversy for many years. In particular, we welcome the expanded discussion of shareholder activities, the structured treatment of the benefit test, and the deeper integration of delineation concepts into the Chapter VII analysis.
Our comments, however, focus less on the technical interpretation of the arm’s length principle and more on the practical challenges multinational enterprises (MNEs)—in practice, the vast majority of mid-sized and even many larger MNEs—face in operationalizing the guidance. We observe that many of the most persistent disputes in this area arise not from disagreement over principle, but from the absence of administrable frameworks for applying those principles consistently across jurisdictions.
In our experience, many of the most significant administrative burdens confronting taxpayers today are not addressed by the proposed revisions. While the draft modernizes aspects of the transactional analysis, it remains rooted in organizational assumptions that may no longer reflect how many MNEs organize, manage, and govern their businesses.
We therefore encourage the OECD to supplement the revised guidance with greater recognition of modern operating models, business strategy, enterprise risk management, and administratively practical approaches to implementing intra-group service policies.
I. Business Strategy Provides Essential Context
Business strategy is not merely background information, as it often provides essential context for determining expected benefit, cost allocation, and the accurate delineation of intra-group services.
Throughout the Consultation Draft, considerable attention is devoted to determining whether an activity constitutes a service, whether an expected benefit exists, and which entities receive that benefit. While these questions are of course important, they are generally considered without reference to the broader business strategy that led management to organize the activity in the first place.
Modern MNEs do not create centralized functions because organizational theory demands them. They centralize functions because management has concluded that doing so improves enterprise performance through greater specialization, consistency, efficiency, governance, or risk management.
Whether evaluating accounting, cybersecurity, tax, legal, procurement, regulatory affairs, finance, or strategic planning, an initial relevant question is often not simply “Who benefits?”, but rather, “Why has enterprise management concluded that this activity should be centralized?”
Exploring the answer to that question frequently resolves much of the uncertainty surrounding the benefit analysis.
Notably, paragraph 7.3 of the Consultation Draft already recognizes this reality. It acknowledges that MNE groups are free to organize their operations as they see fit, and it lists consistency, economies of scale, specialization, reliability, and the protection of intangibles among the reasons a group may secure services internally. Our suggestion is simply that this recognition be carried into the operative guidance: the considerations in paragraph 7.15 should expressly include an MNE’s documented business rationale for undertaking and centralizing the activity as relevant evidence of expected benefit. At present, the commercial realities recognized in paragraph 7.3 are not yet carried through into the application of the benefit test.
Example 1: An ERP Rollout Without an ERP Strategy
The disconnect is apparent from the first substantive example in the Consultation Draft. Paragraph 7.17 assumes that Company A develops an enterprise resource planning system to standardize supply chain, finance, and inventory management and improve data visibility. The system is then “rolled out to all subsidiaries,” including Company B, which fails to complete implementation because key personnel leave. The example concludes that Company B nevertheless received an expected benefit because the original decision to include it in the rollout was reasonable.
That conclusion may be correct. But the example does not provide the information necessary to understand what transaction has been delineated or what costs Company B should bear.
It is unusual for an MNE to implement a major ERP transformation across every legal entity simultaneously and without differentiation. Implementation decisions ordinarily reflect business strategy, sequencing, operational readiness, legacy systems, regulatory requirements, integration priorities (including available IT resources and budget), and the relative importance of particular business segments. The decision to include an affiliate in an ERP transformation is rarely automatic. It is itself a business decision.
The same missing context affects the cost analysis. What costs are being attributed to Company B? Its own local implementation costs? A share of software licensing costs? A ratable allocation of the entire global transformation? Costs associated with functionality required primarily for centralized management reporting? The answer may differ depending on why the system was implemented and on which particular subset of expenditures is at issue.
For example, a centralized entrepreneur may undertake an ERP transformation principally to integrate businesses, control enterprise risks, and improve its own strategic decision-making. Alternatively, independently managed business units may require new systems to improve control and management of their own operations. A third implementation may combine enterprise-level infrastructure with substantial local functionality (i.e., to enable a new transaction not previously configured or available on the legacy ERP.) Each scenario could produce a different answer regarding who benefits and which costs should be borne by which entity.
The example therefore illustrates the limitation of asking “Who benefits?” without first asking “Why is the enterprise doing this?” The absence of business strategy does not merely make the example less complete. It may change the answer.
Example 2: Market Research Without a Business Model
The same concern arises in the paragraph 7.22 example, in which Company A performs centralized advanced market research for a skincare group. The example concludes that centralized market research benefits the distribution entities, but not the manufacturing entities, based principally on which entities are expected to alter their immediate activities in response to the research. Yet the example provides little information regarding why the group centralized the research function, how its product and market strategies are developed, or how the results of the research are expected to influence the business over time. Those facts might not alter the conclusion, but in our experience they often would. Without them, the example risks presenting a particular outcome of a general fact pattern as self-evident, when it is, in fact, highly fact dependent. Furthermore, a sentence or two elaborating on the group’s product and market strategy, and how the research is expected to feed into it, would make the example considerably more instructive.
The Broader Concern
These examples suggest that business strategy is not merely additional background information. In many cases, it provides necessary context for resolving the central questions posed by Chapter VII itself.
The same activity may be undertaken for very different reasons within different MNEs. The fact that two companies undertake superficially similar activities does not mean that the activities serve the same purpose or provide benefit in the same manner.
The revised guidance should therefore encourage taxpayers and tax administrations to understand why an MNE undertakes and organizes an activity as it does before applying the benefit test. Without that context, the analysis risks becoming overly dependent on identifying the most immediate and tangible user of an activity or its output, rather than understanding the role the activity was intended to play within an MNE’s operating model. As a result, the analysis risks becoming over-inclusive (i.e., charging entities that do not meaningfully participate in the underlying strategy) and under-inclusive (i.e., failing to allocate costs to entities that benefit from enterprise-level risk management and strategic investment).
Key Recommendations
Clarify that the benefit test should be applied within the broader context of accurate delineation.
Encourage taxpayers and tax administrations to consider an MNE’s business strategy when evaluating expected benefit.
Expand Examples 7.17 and 7.22 to explain why the relevant activities were centralized before asking who benefits.
II. When Benefit Depends on Perspective
The benefit test should reflect enterprise-level business objectives and risk management, not merely the immediate operational perspective of the recipient entity.
The Consultation Draft generally evaluates benefit from the perspective of the recipient entity. In practice, however, recognition of benefit often depends upon which part of the organization is being asked.
Local commercial personnel may regard enterprise-wide compliance initiatives, cybersecurity protocols, internal controls, or governance procedures as burdens—a nuisance, even—that make their day-to-day responsibilities more difficult and perhaps less profitable. This is often the case where these various initiatives are the result of critical risk management and mitigation procedures. In contrast, executive management likely regards those same activities as essential to protecting enterprise value, avoiding fraud, mitigating regulatory exposure, or preserving long-term profitability.
The draft already contains the raw material to resolve this. Paragraph 7.15(a) recognizes an expected reduction in the recipient’s expenses or losses as a benefit, and Example 1 correctly concludes that a subsequent cyberattack does not negate the benefit of preventative security work performed in good faith. What is missing is the connecting statement: the value of preventative and risk-mitigation activities should be assessed against the enterprise risk being managed, not against the day-to-day preferences of the local personnel subject to the resulting controls.
Merely asking one party, or the other, “Who Benefits?” is unlikely to yield a balanced conclusion on the matter.
Accordingly, the evaluation of expected benefit should be informed by the MNE’s overall business strategy and its enterprise risk management objectives rather than solely by the immediate operational preferences of local business personnel.
Many of the example business cases referenced in the guidance are likely to be inconclusive without an exploration of the corporate level risks giving rise to the service activities in question.
Key Recommendations
Clarify that the benefit test should reflect enterprise-level business objectives and risk management—not merely the immediate perspective of local personnel.
Provide examples that demonstrate the impact of differing stakeholder perspectives within an MNE.
Include an explicit statement in Section B.1.2 that activities undertaken to prevent losses or mitigate enterprise-level risks can satisfy the benefit test even where no adverse event materializes.
III. Chapter VII Should Better Reflect How Modern Organizations Are Managed
The Consultation Draft should better reflect how modern MNEs actually organize, supervise, and manage their businesses, particularly through layered management structures, matrix organizations, and enterprise-wide accountability.
The Consultation Draft frequently distinguishes between shareholder activities, stewardship activities, and chargeable services. While those distinctions remain important, the accompanying examples appear to be distant from the organizational realities of modern MNEs.
In our experience, MNEs rarely employ individuals whose primary function is simply to “manage investments,” or monitor subsidiaries on behalf of shareholders, whilst making vaguely-enforceable recommendations. Rather, such senior management personnel typically exist within layered management structures designed to execute business strategy, allocate resources, manage enterprise risks, supervise personnel, and improve operational performance across multiple jurisdictions, holding their subordinates accountable for their achievements (i.e., business units that themselves often do not map cleanly 1:1 to legal entities) within a rigorous performance framework.
In addition to overhauling the shareholder function archetype, the Chapter VII guidance would benefit from recognizing concepts from organizational theory—including managerial accountability and span of control—as relevant context when evaluating centralized management activities. The Local File already requests information that will support such analysis.[2] Building on that information seems a logical ‘next step.’ Ultimately, narrowly considering only the legal entity through which an individual is employed may be a poor proxy for scoping the economic nature of many a senior manager’s responsibilities.
Key Recommendations
Expand the discussion of modern organizational structures.
Incorporate concepts such as managerial accountability and span of control into the discussion of centralized management activities.
Revise the examples to reflect matrix organizations and layered management structures.
IV. Stewardship Activities Remain Difficult to Apply
The Consultation Draft should more clearly distinguish stewardship activities from shareholder activities and operational management services.
Although the Consultation Draft devotes additional attention to shareholder activities, the distinction between stewardship activities and shareholder activities, as separate categories distinct from operational management services remains difficult to apply consistently.
Many activities identified as stewardship are, in practice, inseparable from broader enterprise management, business strategy, and risk management responsibilities. The revised guidance would benefit from a more expansive articulation of stewardship activities and from examples reflecting modern multinational organizational structures rather than traditional regional holding company models. If a workable framework for stewardship proves too difficult to articulate, the OECD should reconsider whether the category should exist at all. An example that draws clearer distinctions between stewardship, shareholder, and management services would be welcomed.
Key Recommendations
Further clarify the distinction between stewardship, shareholder activities, and management services.
Consider whether stewardship should be excluded if clearer principles cannot be articulated.
Add an example illustrating all three concepts side-by-side.
V. Moving Beyond Yesterday’s Service Models
The Consultation Draft should better reflect how modern MNEs organize and administer geographically dispersed service functions.
We perceive that many of the sample transactions presented throughout the revised Chapter VII reflect controversies that dominated transfer pricing discussions during the emergence of regional headquarters and shared service centers.
Modern MNEs increasingly operate through globally-distributed teams composed of highly-specialized individuals located across numerous jurisdictions. Those individuals frequently participate in enterprise-wide functions that cannot easily be attributed to a single legal entity or traditional service center. In many cases, the medium- to long-term geographic location has little—if anything—to do with an MNE’s operating plan.
Tax departments are therefore less concerned with determining whether a service exists than with determining how such arrangements can be administered consistently, efficiently, and in a manner proportionate to their materiality. The guidance is focused on creating a framework to prevent over-charging. Comparatively little of it addresses the opposite, and in our experience more common, contingency: under-charging or not charging at all. Many under-resourced MNE tax teams would rather not trigger an additional services charge at all unless it is considered to be unavoidable.[2]
The revised guidance devotes considerable attention to identifying services, but comparatively little attention to helping taxpayers operationalize them. OECD Guidance—old and new—may inadvertently achieve a deterrent effect, discouraging taxpayers from implementing intercompany service charges at all, rather than the intended harmonization effect.
Key Recommendations
Expand the guidance to address modern distributed workforces and globally-dispersed specialist teams.
Recognize that taxpayers increasingly struggle with administering services—not identifying them.
VI. Practical Simplification Should Become an OECD Objective
The Consultation Draft should place greater emphasis on practical simplification to encourage proportionate and administrable compliance.
As posited above, many taxpayers find that the administrative burden of establishing intercompany service charges for small, dispersed support functions often exceeds the economic significance of the underlying activities.
Examples include one- or two-person specialist teams embedded within larger operating entities, globally-distributed functional groups, and personnel retained in particular jurisdictions for personal or other legitimate business reasons wholly unrelated to tax planning.
The OECD should consider introducing simplified methodologies for such circumstances, including:
Instances supporting reliance on internal, standardized indirect cost loading percentages;
Simplified methods for determining fully-loaded employee costs;
Budget-based allocations with reasonable year-end variance tolerances (subject to Indirect Tax and Customs Duty limitations);
Proportional documentation expectations based upon materiality; and
Practical guidance for constructing cost pools involving geographically dispersed personnel.
Several hooks for this already exist in the draft. Paragraph 7.44 accepts that direct charging is appropriate only where the necessary information is available without disproportionate compliance costs. Footnote 6 to paragraph 7.58, via paragraphs 2.101 and 2.102 of Chapter II, accommodates budgeted and standard costs. Paragraph 7.71 states that documentation should be proportionate to the materiality and nature of the services. What remains is to extend the same logic to the construction of the cost base itself: standardized loadings and budget-based charging with reasonable true-ups are the practical counterpart of principles the draft already accepts.
Such simplifications would likely increase compliance while reducing unnecessary administrative burden and reliance on sensitive personnel employment and compensation data. These may even offer the secondary benefit of enabling more accurate business data collection for MNE management reporting purposes.
Key Recommendations
Introduce simplified methods for determining fully-loaded costs.
Consider tiered documentation expectations (e.g., category-level vs. transaction-level evidence).
Permit practical administrative conventions for small, geographically dispersed service teams.
VII. Business Strategy Risk, Marketplace Risk, and Entrepreneurial Investment
The Consultation Draft should encourage consistent treatment of entrepreneurial investment costs and the long-term benefits they are intended to generate.
The Consultation Draft appropriately recognizes that expected benefit should be evaluated prospectively rather than solely by reference to actual outcomes. That same principle should apply to centralized investments undertaken pursuant to the enterprise’s business strategy.
Entrepreneurial group members frequently undertake centralized initiatives involving technology, cybersecurity, regulatory compliance, procurement, legal support, commercial capabilities (including redundancies for mission-critical functions), and other strategic investments intended to improve long-term enterprise performance. The mere fact that significant expenses were approved and incurred by an MNE making rational business decisions should carry evidentiary weight in the benefit analysis.
Of course, some initiatives will succeed. Others will not. Or, they may be designed to prevent business failures, which may be challenging to accurately measure in the absence of a triggering event (i.e., success being measured by the absence of a failure). Such uncertainty is inherent in entrepreneurial decision-making.
Where the accurately delineated transaction reflects that an affiliate bears business strategy risk and marketplace risk, that affiliate should ordinarily be expected to participate proportionately in the costs of centralized initiatives undertaken to manage or improve those risks.
Conversely, where tax administrations routinely disallow such charges while continuing to insist that the affiliate benefits from the resulting strategic capabilities, enterprise risk management, and long-term business improvements, the economic framework becomes internally inconsistent. An example may be found in corporate IT expenses that serve the business as a whole, but do not necessarily tangibly interact with personnel of a given, market-facing affiliate. This affiliate should not reasonably be expected to participate in the long-term rewards associated with centralized strategic decision-making while being systematically insulated from its corresponding investment costs. At a minimum, the guidance should acknowledge the delineation consequence of a denied charge, a point we develop further in Section IX.
Key Recommendations
Clarify that entrepreneurial entities bearing business strategy and marketplace risk should ordinarily participate in the costs of centralized strategic initiatives.
Encourage consistent treatment of costs and expected long-term benefits arising from centralized investments.
VIII. Examples Should Better Reflect Today’s MNEs
The Consultation Draft should expand its examples to better reflect modern multinational operating models and commercial arrangements, while also more clearly the conclusions explain to the underlying commercial rationale.
The expanded examples are welcome, but many appear rooted in historical audit controversies and organizational structures that no longer reflect the majority of MNEs.
More broadly, we observe three recurring limitations across the examples:
The absence of business strategy context;
Oversimplified organizational structures; and
Evidentiary expectations that do not reflect how modern services are performed.
We believe that certain examples cannot be fully evaluated without understanding broader transfer pricing concepts, including entrepreneurial ownership, the allocation of business strategy risk and marketplace risk, and the ownership, control, and utility of valuable intangibles. To demonstrate this, we scrutinize two of the annex examples, as follows:
Example 15: What Makes These Operations So Highly Integrated?
Example 15 states that, in Scenario B, “both parties to the transaction are found to make unique and valuable contributions, and their operations are highly integrated so the conditions for applying the transactional profit split method are met.” This conclusion carries more analytical weight than the stated facts obviously support.
If the example is intended to demonstrate that a transactional profit split can apply to the provision of R&D services, it would be considerably more useful if the example explained what it is about the actual business, the parties’ contributions, and the services being performed that makes a profit split more appropriate than the transactional or profit-based policy arrangements MNEs commonly use to organize and compensate R&D activities.
The example explains that Company C conducts exploratory research with substantial autonomy and owns specialized intangible property. But these facts raise more questions than they answer. What is an MNE’s broader product and research strategy, and how does Company C’s work fit within it? How are the broad fields of inquiry selected and funded? Is Company C genuinely pursuing research unrelated to and uninformed by the Group’s existing technology and commercial objectives, or does it exercise scientific autonomy within a broader strategic mandate? We have observed that even highly-exploratory corporate research generally exists within some perimeter established by the company’s existing capabilities, anticipated product opportunities, competitive position, or efforts to address business strategy and marketplace risks. Scientific autonomy should not be confused with strategic autonomy.
The example is similarly unclear regarding Company C’s intangible property. Are those intangibles comprised of proprietary processes, tools, methods, datasets, or know-how that make Company C particularly effective at conducting R&D? If so, many sophisticated contract research organizations possess valuable proprietary capabilities and nevertheless provide complex research services for benchmarkable compensation. Alternatively, is Company C’s pre-existing IP inherently embedded in, or necessary to exploit, the resulting, newly-developed intangibles? That would be a materially different fact pattern. Or does Company C own other, less directly-related valuable intangibles that may exhibit limited direct relevance to the research project under consideration? The mere statement that Company C owns specialized intangibles does not explain what makes its contribution to this transaction unique, valuable, or inseparable from Company A’s contribution.
These missing facts matter because MNEs generally have strong operational (i.e., non-tax) motivations to avoid unnecessary complexity in their intercompany arrangements and, in particular, fragmentation of their IP portfolios. If Company A funds Company C’s exploratory research and bears the financial downside when projects fail, a commercially plausible arrangement might involve defined compensation for the R&D services. If Company C also contributes identifiable background IP, another plausible arrangement might involve service compensation together with defined consideration for access to that IP. The example does not explain why these or other commercially realistic—presumably preferable—alternatives are inadequate, or what makes the parties’ activities so interdependent that their contributions cannot be more readily delineated and compensated separately.
This is the broader concern with examples that do not sufficiently reflect how today’s MNEs actually organize their activities. The reader is given the methodological conclusion but not enough of the functional and logical progression to understand that conclusion.
If the purpose of the expanded examples is to help taxpayers apply the guidance to real businesses, a fact pattern constructed primarily to satisfy the criteria for a particular method has limited instructional value. The example would be far more useful if it began with a recognizable commercial arrangement and showed, step by step, why the actual features of that arrangement make the profit split the most appropriate method, and what factors would permit a more operationally efficient policy.
Example 21: IT Support Without an IT Strategy
Example 21 presents two scenarios involving intra-group IT support. In the first, a tax administration requests evidence that Company A actually provided IT services to Company B and that Company B benefited from them. The example suggests that Company B could substantiate the services through representative IT tickets and records of services provided. In the second scenario, Company B also engages a local third-party IT provider, raising the question of whether the intra-group and local services overlap.
These are familiar issues and may also be reasonable questions. A tax administration is entitled to seek evidence that a service was actually performed, that the recipient was expected to benefit, and that a claimed allocation bears some reasonable relationship to the services provided.
But the example is so simplified that it offers little guidance regarding the circumstances in which those questions arise. “IT support services” can encompass an extraordinarily broad range of activities, from local desktop support and password resets to cybersecurity, enterprise architecture, cloud infrastructure, ERP administration, data governance, network management, disaster recovery, vendor management, and the maintenance of systems used across an entire region or MNE group. The mere fact that an affiliate employs local IT personnel or engages—or could engage—a local IT provider tells us very little about whether centralized IT services duplicate those activities.
Nor do all IT services generate tickets. Tickets may provide useful evidence for some forms of user support, but they are a poor proxy for many centralized activities. A cybersecurity team monitoring enterprise threats, personnel maintaining shared infrastructure, an architecture function establishing common technical standards, or specialists managing enterprise-wide systems may perform activities whose value cannot reasonably be demonstrated through a collection of local help-desk requests.
The same concern applies to the apparent availability of lower-cost local providers. An MNE selecting a provider for a particular IT function may consider far more than hourly cost. The provider may require access to enterprise systems and sensitive data. Management may require a reputable and highly-qualified provider with consistent security protocols across many jurisdictions, integration with common infrastructure, institutional knowledge of the group’s systems, continuity of service, regional or global coverage, or accountability to a centralized technology and risk-management function. A lower-cost local provider may therefore not represent a realistic alternative at all.
The missing question, again, is “Why did the MNE organize the activity in this manner?” Which IT activities were centralized, and which were deliberately left local? What business objective did the centralized function serve? Why did management conclude that the relevant activities should be performed consistently across the group or region? What role do local personnel or third-party providers play within that broader operating model?
Without that information, Example 21 risks reinforcing the same narrow analysis that taxpayers frequently encounter in practice: a charge is challenged because the local entity already has personnel with a similar functional label, because a local provider appears less expensive, or because the taxpayer cannot produce evidence at a level of granularity disproportionate to the charge at issue.
We have observed challenges to centralized service charges that frequently involve amounts for which the cost of developing additional evidence, pursuing administrative remedies, or contesting an adjustment may rival the tax at issue. Taxpayers with limited resources (especially personnel) may therefore accept adjustments they believe are unwarranted. This decision then is often not because the underlying services lacked value, but because contesting the adjustment is economically irrational or creates disproportionate controversy and broader business costs.
Examples intended to improve the administration of intra-group service disputes should therefore be careful not to validate overly narrow evidentiary approaches. The appropriate burden of substantiation should be proportionate to the nature and amount of the charge, while recognizing that modern centralized functions often operate through shared systems, continuous activities, and enterprise-wide responsibilities that may not generate recipient-by-recipient records.
Example 21 could be considerably more useful if it began with a recognizable modern IT operating model. The example should then explain which activities are centralized, which remain local, why an MNE chose that structure, what risks and business objectives the structure is intended to address, and how the centralized and local providers interact. The documentation question could then be evaluated against the services actually being provided, rather than against an undifferentiated label such as “IT support.”
The same approach would improve the analysis of potential duplication and relevance of lower-cost, local alternatives. The existence of local IT personnel, a local service provider, or a cheaper vendor does not answer whether the activities are duplicative or whether the alternatives are comparable. Those conclusions require an understanding of an MNE’s actual technology environment, service model, security requirements, and business strategy.
We recommend an example that clearly demonstrates how the facts of an actual operating model inform the benefit analysis, the evidentiary burden, and the assessment of realistic alternatives.
Key Recommendations
Expand the examples to reflect modern MNE operating models (e.g., modern organizational structures, distributed workforces, matrix organizations, digital business models, and enterprise-wide functional teams).
Better explain the commercial facts supporting the conclusions reached.
Consider soliciting contemporary business examples from taxpayers and practitioners.
IX. Consistency Between Service Charges and Functional Characterization
The Consultation Draft should clarify that conclusions reached under the benefit test should be reflected consistently in the recipient’s functional characterization for related transactions.
The Consultation Draft appropriately distinguishes between the benefit test and the pricing of a service (paragraph 7.19), and acknowledges that indirect charging can increase the risk of double taxation (paragraph 7.49). One practical consequence, however, receives little attention: what does a denied service charge imply about the functional profile of the entity said to have received no benefit?
A contrary determination that no beneficial service was received should not be a free-standing conclusion. It is a factual finding about the recipient: that the recipient performs the function itself, obtains it elsewhere, or genuinely operates without it. Under Section D.1 of Chapter I, that finding belongs in the accurate delineation of the recipient’s transactions, because an entity’s functional profile is defined by the functions it performs and the risks it controls. In practice, however, the finding rarely makes the trip.
The pattern we observe is this: A tax administration denies a management or headquarters charge to a subsidiary, while the same audit accepts—or insists upon—a routine, limited-risk return for that subsidiary, benchmarked on the premise that the parent performs and controls precisely the functions in dispute. Consider a local securities subsidiary whose parent operates group risk management, treasury, and compliance oversight. If the charge for those functions is denied on the basis that no service was received, the subsidiary must be performing and controlling those functions itself. An entity that controls its own economically significant risks is not the routine entity the benchmarking assumed. The two positions cannot both be correct, yet nothing in the draft discourages a tax administration from asserting both, resulting in potential double taxation with no principled path for resolution.
Example 5 shows how close the Consultation Draft comes to the issue without engaging it. The example carefully splits the parent’s management information system activity between shareholder activity (consolidation for the parent’s own reporting) and a chargeable service (advice on re-allocating capital toward higher-growth segments). It says nothing about what that split implies for the subsidiaries. If the capital reallocation advice meets the benefit test, the subsidiaries are, to that extent, not the autonomous decision-makers that a standalone benchmarking analysis might otherwise assume them to be. The charge determination and the functional characterization are two views of the same facts, and they should be required to match.
Section VII of this letter touched on this point in the context of entrepreneurial investment. We believe it merits treatment as a free-standing principle. We recommend a short addition to Section B stating that the outcome of the benefit test should be reflected consistently in the functional analysis of the recipient for the same and related transactions. In particular, where a charge is denied on the basis that no service was received, the delineation of the recipient’s other transactions should proceed on the footing that the recipient bears the corresponding functions, risks, and costs itself. A single paragraph to this effect would remove a class of internally inconsistent adjustments that currently generates disputes with no satisfactory exit.
Key Recommendation
Clarify that conclusions reached under the benefit test should be reflected consistently in the recipient’s functional characterization for related transactions.
IX. Regulated Financial Services Merit Additional Guidance
The Consultation Draft should better recognize how prudential regulation influences multinational operating models and the provision of intra-group services.
Although many of the examples throughout the Consultation Draft are drawn from manufacturing, distribution, and general corporate support functions, the revised guidance will apply equally to regulated financial institutions. Yet regulated industries receive comparatively little attention, notwithstanding that regulation is often one of the principal drivers of how MNEs organize cross-border support functions and allocate responsibilities across legal entities.
As discussed throughout these comments, understanding why an MNE has organized itself in a particular manner is frequently a necessary prerequisite to evaluating who benefits from the resulting services. In regulated industries, that “Why?” is often shaped not only by commercial considerations, but also by prudential regulation, supervisory expectations, and the various legal requirements that prescribe where functions must be located and how they must be performed.
Paragraph 7.32 is therefore a welcome addition. The Consultation Draft appropriately acknowledges that where regulation requires functions such as compliance and risk management to be performed both locally and on a consolidated basis, the apparent duplication should not itself lead to disallowance. We agree with that conclusion. In our view, however, the broader significance of regulation extends well beyond avoiding inappropriate duplication challenges.
For many regulated financial groups, regulation is itself an economically relevant circumstance that influences the operating model adopted by an MNE. Prudential frameworks commonly require risk management, internal audit, compliance oversight, and model governance to operate at the consolidated level. Outsourcing frameworks frequently prescribe contractual provisions governing service levels, audit rights, business continuity, and termination rights. In some jurisdictions, banking and financial services legislation independently requires transactions between affiliated entities to be conducted on arm’s length terms. These are not simply facts surrounding a particular transaction—they are among the reasons management chooses to organize the enterprise in the manner it does.
Viewed through this broader commercial lens, regulation becomes part of an MNE’s business strategy rather than merely an explanation offered after a service charge has been challenged. Management frequently centralizes these functions because doing so is necessary to satisfy regulatory expectations, maintain consistent enterprise-wide controls, and manage business strategy and marketplace risks across the group. Those organizational decisions provide important context when evaluating the benefit test, considering realistic alternatives, and assessing whether an independent enterprise would have been willing to obtain comparable services.
The examples in the annex bear this out. None of the twenty-one examples involves a financial services business. The sole financial services illustration in the draft, the investment banking credit risk analysis in paragraph 7.81(b), is carried over from the existing low value-adding services guidance. Meanwhile, paragraph 7.78 excludes financial transactions and insurance from the simplified approach without corresponding affirmative guidance on how the full Chapter VII framework should apply to regulated financial groups. For groups whose every material function sits inside a regulatory perimeter, the Consultation Draft currently offers only limited practical guidance.
We therefore encourage the OECD to expand Chapter VII to better reflect the role that regulation plays in shaping MNE operational models. Additional examples involving consolidated risk management, regulated outsourcing arrangements, portfolio management or sub-advisory services, treasury-adjacent support functions, and other prudentially driven service models would significantly improve the practical usefulness of the guidance. More fundamentally, we believe the Consultation Draft should recognize that regulation is not merely a response to duplication concerns, but one of the commercial realities that frequently explains why MNEs organize, centralize, and charge for services in the first place. There may be scope to expand on these points in Chapter I, but this is outside the scope of the Consultation Draft and WP6’s current remit.
Key Recommendations
Recognize regulation as an economically relevant circumstance that informs both an MNE’s operating model and the options realistically available to management.
Expand the Consultation Draft to include examples drawn from regulated financial services and other prudentially regulated industries (such as a consolidated group risk management function mandated by prudential regulation, and a portfolio management or sub-advisory arrangement illustrating the possibility, recognized in paragraph 7.7, of selecting the service recipient as the tested party).
Clarify the interaction between Chapters VII and X for treasury-adjacent and other regulated support functions.
X. Pass-Through Where the Intermediation Itself is Regulated
The Consultation Draft should recognize that legal and regulatory frameworks may provide important evidence regarding the treatment of pass-through costs where comparable market pricing is limited or unavailable.
We welcome the expanded discussion of pass-through costs in paragraphs 7.63 to 7.65, and in particular the recognition in paragraph 7.64 that industry norms and practices can evidence whether a class of costs is typically recharged without a mark-up. This is a helpful addition that recognizes the commercial reality that not every recharge necessarily reflects the performance of a value-adding service.
The accompanying example, however, illustrates one of the more straightforward applications of these principles. Advertising expenditures often benefit from observable third-party agency arrangements, well-established market practices, and readily identifiable commercial relationships. For many MNEs, difficult questions commonly arise where comparable market evidence is either limited or simply unavailable.
This is particularly true among regulated financial services and other intermediated industries, where one entity frequently incurs costs on behalf of affiliates as part of a broader operating model. Examples include execution, clearing, and exchange fees incurred by a group broker on behalf of affiliates; sub-custody fees within global custody chains; fund administration and transfer agency fees; ceded reinsurance premiums; and market data licensing recharged across a group. In many of these situations, independent market pricing is ‘invisible,’ owing to being embedded within broader commercial arrangements that cannot realistically be isolated or benchmarked in the manner contemplated by the current Consultation Draft.
Once again, understanding why the arrangement exists provides important context. The intermediary often performs its role because regulatory frameworks, licensing requirements, or the group’s operating model require it to do so. Whether the intermediary acts as principal or agent may be dictated by client asset rules, custodial obligations, outsourcing regulations, or other legal requirements rather than by commercial preference alone. Those same legal and regulatory characteristics frequently provide more persuasive evidence regarding the nature of the costs than any observable third-party pricing data (if such data is available with reasonable effort and expense).
Paragraph 7.65 appropriately confirms that where an enterprise acts as an agent, any mark-up should apply to the costs of performing the agency function rather than the underlying costs of the services arranged. In our experience, however, disputes in this area more often concern the appropriate cost base than the mark-up itself. Clarifying that the mark-up applies only to the intermediary’s own operating costs—and not the underlying pass-through expenditures—would resolve many practical disputes before they arise.
More broadly, this section illustrates a recurring theme throughout these comments. The Consultation Draft appropriately seeks objective evidence supporting the arm’s length character of intra-group arrangements. In practice, however, that evidence will not always be found in comparable market pricing. Particularly in regulated industries, the strongest evidence may instead be found in the commercial realities that shaped the arrangement itself: the regulatory framework, the operating model adopted by management, and the role the intermediary performs within the broader enterprise.
Key Recommendations
Recognize that legal and regulatory capacity may constitute relevant evidence when determining whether costs are appropriately treated as pass-through amounts.
Supplement Example 20 with an example drawn from a regulated or intermediated industry where comparable market evidence is not readily observable.
XI. Conclusion
The revised Chapter VII represents an important step toward modernizing the OECD’s guidance on intra-group services. We believe its utility would be significantly enhanced by recognizing that today’s MNEs increasingly organize themselves around centralized expertise, distributed talent, business strategy, and enterprise risk management rather than around traditional and necessary legal entity structures.
The Consultation Draft appropriately reinforces both accurate delineation and the benefit test. In practice, however, these analyses increasingly converge. Many disputes do not arise because taxpayers fail to consider benefit, but because benefit is evaluated without sufficient understanding of an MNE’s operating model, business strategy, and allocation of risks. In that context, the benefit analysis becomes a natural extension of accurate delineation rather than a separate mechanical exercise.
Broadly, we encourage the OECD to clarify that:
The benefit test should be applied within the broader context of accurate delineation; and
The identification of benefit should reflect the enterprise’s business strategy and risk allocation, rather than focusing narrowly on immediate, entity-level outcomes.
Without this clarification, the continued application of a standalone benefit test risks perpetuating disputes rather than reducing them.
The OECD has appropriately strengthened the analytical framework governing intra-group services. We respectfully suggest that the next stage of that modernization should also focus on ensuring that the guidance is equally reflective of how MNEs actually organize, manage, and govern their businesses today. Furthermore, the guidance should be sensitive to its administrability by MNEs whose operations emulate those of larger enterprises, yet who operate with far more limited tax resources.
We commend the OECD Centre for Tax Policy and Administration and WP6 for undertaking this important modernization initiative. We hope these comments assist in developing guidance that not only reflects the arm’s length principle without unduly increasing administrative burden, but also accommodates the realities of how MNEs are increasingly organized, managed, and governed. We would welcome the opportunity to discuss these observations further during the November 2026 public consultation and to contribute to the continued evolution of Chapter VII.
___
[1] Per Annex II to Chapter V, the following information should be included in the local file, “A description of the management structure of the local entity, a local organisation chart, and a description of the individuals to whom local management reports and the jurisdiction(s) in which such individuals maintain their principal offices.”
[2] An oversight that is often reasonably overlooked by a ParentCo’s financial statement auditor, owing to the limited materiality of one-off transactions vs. the business as a whole.