Transfer pricing: charging methods for services
According to the OECD Guidelines1, there are two main issues when analysing intra-group services:
• whether an intra-group service that should be charged for has been provided (see B4.146), and
• what is the arm's length charge for that service, which is outlined below
Chapter VII of the OECD Guidelines deals specifically with the issue of charging for intra-group services between related parties. The OECD has consulted on proposed changes to its Transfer Pricing Guidelines. Comments were invited on future revisions to Chapter VII 'Special Considerations for Intra-Group Services', focusing on the practical application of the guidance (rather than the underlying principles) for more details see ND.1250.
The guidelines suggest two main methods — the direct charge method and the indirect charge method2.
A direct charge is one levied to a particular affiliate for a particular service, whilst an indirect charge is applied through other means, usually using various allocation methods. A direct charge has the advantage of providing greater transparency and provides further documentary evidence as to the validity of the charges. The amount to be charged can be ascertained from time sheets, charges to an account or job code, etc.
An indirect charge is made where for some reason, such as the administrative burden of so doing, costs incurred on behalf of any one associate cannot reliably be tracked. The result is that all costs incurred in providing a service are collected together and then shared out among the