Low-Value-Adding Services

Low-value-adding services (LVAS) are intra-group services provided within multinational enterprises (MNEs) that are generally considered supportive in nature, lack significant value creation, and are not core to business operations. According to the OECD Transfer Pricing Guidelines, 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:

  1. Supportive Nature: Services that assist the primary functions but do not drive business profits directly.
  2. Standardization: They are repetitive and involve little customisation.
  3. Low Risk and Low-Profit Potential: These services are generally non-risk bearing and generate only minimal incremental revenue.
  4. Simplicity of Execution: They do not require extensive expertise or significant investment in technology or intellectual property.

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 pricing approach as permitted under the OECD 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 MNE 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 compliance. 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 allocation for routine services. The dispute highlighted the challenges of distinguishing between LVAS and core activities. The ruling underscored the significance of maintaining transparent intercompany agreements and benchmarking studies.