About this Margin Note

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).