Low-Value-Adding Services - Academy of Tax Law

Low-value-adding services (LVAS) are intra-group servicesFOR MORE INSIGHT ON INTRA-GROUP SERVICES, PLEASE READ THIS ARTICLE: Intra-Group Services: Guidelines, Examples, and Risk Management Strategies Intra-Group Services refer to activities performed by one entity within a multinational enterprise (MNE) group that benefit one or more associated enterprises. These services may include administrative, technical, financial, or commercial assistance provided by a central company to its affiliates. A primary... provided within multinational enterprisesWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... (MNEsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include...) that are generally considered supportive in nature, lack significant value creation, and are not core to business operations. According to the OECD Transfer Pricing GuidelinesThe OECD Transfer Pricing Guidelines serve as a critical framework for multinational enterprises (MNEs) and tax administrations worldwide. They provide detailed principles for the pricing of intra-group transactions to ensure that profits are allocated fairly across jurisdictions, based on the arm’s length principle. In essence, these Guidelines are instrumental in preventing tax base erosion and profit shifting by MNEs. The..., LVAS are characterized by their routine and ancillary function, low risk, and minimal contribution to profit generation. Common examples include administrative support, IT services, and routine accounting. These services typically do not require unique or highly specialized skills and are often standardized to support day-to-day business needs.

Characteristics of Low-Value-Adding Services

LVAS have specific features that distinguish them from higher-value activities. These characteristics include:

Supportive Nature: Services that assist the primary functions but do not drive business profits directly.
Standardization: They are repetitive and involve little customisation.
Low Risk and Low-Profit Potential: These services are generally non-risk bearing and generate only minimal incremental revenue.
Simplicity of Execution: They do not require extensive expertise or significant investment in technology or intellectual propertyIntellectual Property (IP) refers to creations of the mind, including inventions, literary and artistic works, symbols, names, images, and designs used in commerce. It grants creators exclusive legal rights to use and exploit their work, ensuring protection against unauthorised use or reproduction. These rights are critical in fostering innovation and creativity while providing economic value to individuals and organisations. IP....

These characteristics make LVAS a focal point for tax authorities assessing whether appropriate remuneration has been charged within the group for such services.

Practical Examples of Low-Value-Adding Services

Example 1: Routine Administrative Support

A multinational manufacturing company, ABC Group, centralizes its administrative support functions, including secretarial services, general office management, and document handling, at its shared service center. These activities are coordinated and provided to subsidiaries across different countries. Since administrative services do not drive direct profit for subsidiaries but are necessary for smooth operations, they are classified as LVAS. ABC Group applies a simplified transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... approach as permitted under the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... Guidelines, charging each subsidiary on a cost-plus basis with a modest mark-up, ensuring compliance while avoiding complex documentation.

Example 2: IT Support Services

XYZ Global Ltd, an MNEWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... operating in the pharmaceutical sector, outsources its IT support services to a group entity located in a low-cost jurisdiction. This entity handles routine software maintenance, basic troubleshooting, and infrastructure support for all affiliates. Given that these activities involve minimal strategic input and do not impact the core pharmaceutical business, they are considered LVAS. The cost of these services, allocated to affiliates, includes a small mark-up, justifying their low economic significance and reflecting an arm’s length standard.

Example 3: Routine Legal Services

LMN Group, a multinational enterprise in the logistics industry, has a central legal department that manages routine tasks like contract drafting, regulatory filings, and compliance documentation. These legal services are not specialized or revenue-generating but ensure legal adherence across the company. Hence, LMN treats these legal functions as LVAS, allocating costs to subsidiaries with a fixed percentage mark-up to simplify tax complianceTax Compliance refers to the adherence of individuals and businesses to the tax laws and regulations of a specific jurisdiction. It encompasses the timely and accurate filing of tax returns, the payment of tax liabilities, and ensuring that all tax-related obligations are met as stipulated by legislation. Compliance involves more than just submitting tax forms; it includes maintaining accurate financial.... More complex legal cases, such as litigation or mergers, are separately invoiced as high-value services.

Cases and Judgments Involving Low-Value-Adding Services

A notable case addressing LVAS is Société Générale v. French Tax Authorities (2018), where the French court scrutinized the MNE’s allocation of costs for shared services across its subsidiaries. The core issue was whether these services, including back-office support and general administration, were genuinely beneficial to the subsidiaries and priced appropriately. The judgment reinforced the need for clear documentation demonstrating the nature, value, and arm’s length pricing of such services.

Another landmark case, GlaxoSmithKline v. HM Revenue & Customs (UK), explored cost allocationCost Allocation involves assigning common or indirect costs—such as administrative expenses, research and development (R&D) costs, or IT infrastructure fees—to the business units that benefit from them. This allocation is based on a pre-determined formula or allocation key that reflects the proportionate use or benefit derived by each unit. Methods for cost allocation can vary, but common allocation keys include... for routine services. The dispute highlighted the challenges of distinguishing between LVAS and core activities. The ruling underscored the significance of maintaining transparent intercompany agreementsIntercompany Agreements (ICAs) are legally binding contracts between two or more entities within the same corporate group. These agreements outline the terms and conditions of transactions such as the sale of goods, provision of services, use of intellectual property, or intercompany financing. ICAs are crucial for managing transfer pricing compliance, mitigating tax risk, and demonstrating that intercompany transactions are conducted... and benchmarkingBenchmarking, within the context of transfer pricing, refers to the process of analysing and comparing financial and economic data from independent companies to establish a fair and arm’s length price for controlled transactions. It is typically conducted using databases that provide details about comparable companies and transactions. The objective is to determine whether the terms and conditions of intercompany transactions... studies.