Intragroup Services

1. Overview of Intragroup Services

Intragroup services refer to the services provided by one or more members of a multinational group for the benefit of other members within the group. These services can include, but are not limited to, management services, administrative services, technical and support services, purchasing, marketing and distribution services, and other commercial services that are relevant to the nature of the group’s business.

Initially, the costs of these services are covered by the parent or other service companies within the multinational group, and eventually, they are reimbursed by other associated persons through intragroup arrangements.

2. No intra-group service should be found for the following activities:

Shareholder activities:

Shareholder activities refer to activities performed by a group member (usually the parent company) solely due to its responsibility as a shareholder, based on its ownership interest in one or more members of the group.

Examples of non-chargeable shareholder activities include:

• Costs related to the legal structure of the parent company, such as shareholder meetings, issuing shares, and supervisory board costs.
• Costs associated with reporting and legal requirements of the parent company, such as producing consolidated accounts or reports for shareholders, and filing prospectuses.
• Costs incurred to raise funds for acquiring new companies to be held by the parent company (distinct from fundraising for existing subsidiaries).

Duplicative services

Duplicative services are services performed by a group member that duplicate a service already provided in-house by another group member or by a third party. In such cases, any duplicative claims will be automatically disallowed. The ability of a group member to independently perform the service (considering qualifications, expertise, and personnel availability) will be considered when evaluating duplication of services.

Example 1
A subsidiary has qualified personnel to analyze its capital and operational budget. The parent company’s financial personnel then review this analysis. The review by the parent company is considered duplicative.

However, there are exceptions where duplication of services can be charged, such as:

• Special circumstances where duplication is temporary, such as implementing a new system while operating an existing system for a short period to address unforeseen circumstances during the initial implementation.
• Obtaining a second legal opinion on a particular project to reduce the risk of making a wrong business decision.

Services that provide incidental/passive association benefits

These are services performed by one member of a multinational group, such as a shareholder or coordinating center, which specifically relate to certain group members but incidentally provide a benefit to other members of the group. Incidental benefits may also arise from an associated person being part of a larger concern, unrelated to any service actually provided. Such incidental benefits would not warrant a charge to the incidental recipient, as the perceived benefit is indirect and remote, and an independent person would not be willing to pay for the activities giving rise to the benefit. Therefore, they should not be considered as intra-group services to the incidental recipient.

Example 2
An enterprise that obtains a higher credit rating due to its membership in a multinational group should not be charged for its mere association with the group. However, if the higher credit rating is due to a guarantee provided by another group member, then an intra-group service can be considered to have been rendered.

On-call services

On-call services refer to services provided by a parent company or a group service center to members of the group at any time, such as financial, managerial, technical, legal, or tax advice.

1. These services are considered non-chargeable under the following circumstances:
   • Services are easily and promptly available without any standby arrangement.
   • The potential need for such services is remote.
   • No or negligible benefits are derived from the services.
2. If exceptional circumstances require on-call services to be considered chargeable, it must be proven that an independent person in comparable circumstances would incur such charges to ensure the availability of the services when needed.

3. Other services commonly found among associated individuals include:

a. These activities are performed by a member of a multinational group to meet the specific needs of its associated person.
b. These activities are centralized in the parent company, regional headquarters companies, or a group service center.
c. These services are provided as additional or subsidiary services in relation to other transactions, such as the transfer of a property (e.g., intangible asset) or the commencement of the actual use of a property. The IRBM requires that charges for these services be separately shown or capable of being shown separately if necessary.

4. Application of arm’s length principle for intragroup services

In applying the arm’s length principle to intragroup services, taxpayers should consider the following:
i) Whether services have been provided.
ii) If services have been provided, whether the charges for these services are at arm’s length prices.

The following factors should be considered to determine whether services have been provided:
i) Whether the service recipient receives benefits that have economic or commercial value.
ii) Whether an independent enterprise in comparable circumstances would be willing to pay for the services or perform such services in-house.

A benefit is considered to have economic or commercial value if it:

• Enhances the recipient’s return or profitability by improving production efficiencies.
• Results in cost savings or a decrease in the recipient’s operating expenses, such as reducing production time.

Charges for intragroup services must be consistent with the relative benefits intended from the services, based on the facts known at the time the services were provided, and at arm’s length. If the anticipated benefits are not realized, taxpayers need to justify that an independent party would be willing to pay for the services.

5. Methods of charging for provision of services

In the charging for the provision of services, a service provider can use either a direct charge method or an indirect charge method. The direct charge method is preferred because it allows for easy determination of whether the charge is consistent with the arm’s length principle, and evidence for direct charges is usually readily available.

Direct Charge Method:

i) The direct charge method is suitable for a specific service where the service, the beneficiary, the cost incurred, and the basis of charge can be clearly identified. This allows for direct allocation of costs to the recipient.
ii) The direct charge method must also be used when the specific service is a main business activity of the service provider and is provided to both associated persons and independent parties.

Indirect Charge Method:

i) The indirect charge method is used when the direct charge method is impractical or when the arrangements for the services provided are not easily identifiable. This occurs when costs are attributable to multiple related enterprises and cannot be specifically assigned to the recipients of services. The IRBM discourages the use of the indirect charge method, so service recipients should be prepared to support their claims when using this method, especially if it represents a significant amount of total claims.

Example 3
Circumstances when the indirect charge method may be applicable:

• When sales promotion activities, such as international fairs or global advertising campaigns, benefit the group members as a whole and result in increased quantity of goods produced or sold by group members.
• The provision of information technology services, such as management information systems involving the development, implementation, and maintenance of inter-company electronic data, such as transmission of marketing data, production and scheduling forecasts, and accounting data.
• Provision of accounting services to all members of a multinational group.

ii) The method is based on cost allocation and apportionment using an appropriate allocation key that aligns with the nature and purpose of the service provided. For example, payroll services may be allocated based on the number of staff rather than turnover, while the usage of networking infrastructure may be allocated based on the number of computer users.
iii) The arm’s length principle requires that the amount allocated to a member of a group is proportional to the individual member’s benefit or expected benefit from the services or reflects their share of the total benefits attributable to that recipient. Taxpayers should document the analysis used to determine the allocation key.
iv) The IRBM does not accept allocation keys based on sales unless the taxpayer can justify the correlation between sales and costs incurred.

6. Profit mark-up

When considering intragroup services, it is important to assess whether marking up costs is justified and to understand the nature of the activity, its significance, the efficiency of the service provider, and any advantages it brings. The arm’s length price of specialized services may differ from general services. When using the cost-plus method, the arm’s length return should only reward the agency or intermediary function. A markup from an overseas affiliate service provider may not automatically be considered arm’s length in Malaysia, requiring a benefit test from the service recipient’s perspective.

Our services include:

• Preparation of Transfer Pricing Documentation
• Conduct benchmarking studies to compare the pricing of intercompany transactions with comparable transactions in the open market.
• Help companies assess and manage transfer pricing risks.
• Assist companies in developing and implementing transfer pricing policies that align with their business strategies and comply with local regulations.
• Support companies in negotiating and securing Advanced Pricing Agreements with tax authorities.
• Training and Education