Transfer Pricing rules establish how transactions between related companies should be evaluated for tax purposes. When a company shares teams, services, or resources across different entities within the same group, these arrangements may create documentation, compensation, and tax compliance obligations.
Many companies expanding their operations to the United States keep part of their teams in other countries. It is common to see structures where the U.S. company centralizes contracts, billing, and client relationships, while professionals located in other jurisdictions support areas such as finance, human resources, customer service, marketing, or operational support.
At first, this may seem like a simple operational decision. However, international Transfer Pricing rules, aligned with OECD Transfer Pricing Guidelines and applicable local regulations, require careful analysis of these relationships between companies within the same group.
When do Transfer Pricing rules apply to intragroup transactions?
In simple terms, an intragroup transaction may exist when one related company benefits another through the provision of services, sharing of resources, or activities that create value for another entity.
For example, imagine that a company outside the United States has HR, finance, or customer service professionals who spend part of their time supporting the U.S. company within the same group. Even if there is no formal billing between the companies, tax authorities in the relevant jurisdiction may understand that a service was provided and should be analyzed from a Transfer Pricing perspective.
The purpose of these rules is to ensure that transactions between related companies occur under conditions similar to those that would be agreed between independent parties, a principle known as arm’s length.
In practice, informal activities performed between companies within the same group may require documentation and, in some cases, appropriate compensation for tax purposes.
Situations that may require attention to Transfer Pricing rules
Your company may need to review its structure if it has:
- Human resources teams supporting hiring or personnel management for the U.S. company;
- Finance professionals performing administrative or control activities for group entities;
- Customer Success or operational support teams serving clients of the U.S. company;
- Shared administrative areas between related companies;
- Internal information technology support.
In these cases, it is important to evaluate who is effectively benefiting from the activity performed and whether the services provided need to be documented and compensated.
What are Low Value-Adding Intragroup Services?
The OECD guidelines recognize that certain services are mainly operational or support-based, without representing strategic activities or directly generating value for the group.
These services are known as Low Value-Adding Intragroup Services.
In general, this category may include activities that:
- Have an administrative or operational nature;
- Are not part of the group’s core business activity;
- Do not involve relevant intangible assets or significant risks;
- Are not related to strategy definition or the creation of competitive advantage.
Examples commonly associated with this concept include routine activities in human resources, administrative finance, administrative legal support, and certain internal technology services.
What are the benefits of this classification for Transfer Pricing purposes?
When a service meets the requirements established by the OECD guidelines and the applicable local legislation, a simplified Transfer Pricing methodology may be applied.
In general, this approach considers the costs of providing the services plus a 5% markup, reducing the complexity of the analysis typically required to demonstrate that the transaction was carried out under conditions consistent with those agreed between independent parties.
However, applying this methodology depends on proper documentation of the transaction, including the costs involved, the service recipients, and the allocation criteria used.
What services generally do not qualify as Low Value-Adding Intragroup Services?
Not every activity performed between related companies qualifies for the simplified methodology.
Activities related to software development, research and development (R&D), intellectual property creation, strategic management, market development, commercial strategy, or brand management generally require a more detailed analysis. This is because these functions often contribute directly to value creation and the development of competitive advantages within the group.
Why is documentation important under Transfer Pricing rules?
Tax authorities, both in the United States and in other relevant jurisdictions, evaluate the economic substance of a transaction, not just how it is described contractually.
For this reason, companies should maintain appropriate documentation demonstrating:
- Which activities were performed;
- Who benefited from the services;
- How costs were identified and allocated;
- Which methodology was used to determine the compensation.
The absence of adequate documentation may significantly increase tax risks during audits in any of the jurisdictions involved.
Transfer Pricing checklist: What should your company evaluate?
Consider the following questions:
- Are professionals located outside the United States providing services or support to the U.S. company within the group?
- Are teams, resources, or activities shared between related entities?
- Are there intercompany agreements and supporting documentation formalizing these arrangements?
- Could the services provided qualify as Low Value-Adding Intragroup Services?
Conclusion
As companies expand their operations into the United States, it is natural for people, resources, and activities to be shared across different entities within the same group. Many of these structures are created to support business growth and improve operational efficiency. However, Transfer Pricing rules, both in the United States and in other relevant jurisdictions, make it important to review how these relationships are documented and compensated.
Understanding these requirements in advance can help companies strengthen their tax governance and reduce risks associated with transactions between related parties.
Globalfy helps companies with international operations evaluate corporate structures, intercompany agreements, Transfer Pricing policies, and supporting documentation, helping businesses build more secure operations that align with the applicable regulations in each jurisdiction.