Drawing the line between intra-group transactions

Multinational enterprise (MNE) groups almost always require a broad range of services to support their operations - covering administrative, technical, financial, and commercial needs.

- PATRICK MANUEL R. OLARTE

These services often involve management, coordination, and control activities that cut across borders and business units. And just as an independent enterprise can choose to perform a service in-house or outsource it to a specialist, an MNE member may acquire services externally or from capable associated enterprises within the group.

This decision, whether to source services internally or externally, raises deeper questions beyond cost and convenience. Are these services truly adding value within related-party arrangements, and does an actual intra-group transaction exist in the first place? Or are charges being made for services that offer no benefit at all? Answering these questions requires more than operational considerations; it calls for strict compliance with transfer pricing principles to ensure that intercompany transactions are carried on at arm's length.

Fortunately, the Bureau of Internal Revenue (BIR), through Revenue Audit Memorandum Order (RAMO) No. 1-2019, and the Organization for Economic Cooperation and Development (OECD), via its Transfer Pricing Guidelines, offer a framework to help businesses draw the line on what constitutes a valid intra-group transaction.

In this edition of Let's Talk TP, we discuss how to determine whether an intra-group service is chargeable, what activities fall outside the scope of chargeable services, and why the "Benefits Test" and proper documentation are critical to aligning business practices with regulatory expectations.

WHAT ARE INTRA-GROUP SERVICES?