Article by: Camille Vilaseca – First published on KluwerTaxBlog
Duplicate services are defined in the 2017 Transfer Pricing Guidelines (TPG) of the OECD as “activities undertaken by one group member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party.”
Those activities are expressively labeled as not being intra-group services and therefore they are not chargeable to the group entity deemed to receive the duplicate services.
The OECD mentions two exceptions where the services will indeed be duplicated but this duplication is justified and thus chargeable: “An exception may be where the duplication of services is only temporary, for example, where an MNE group is reorganizing to centralize its management functions. Another exception would be where the duplication is undertaken to reduce the risk of a wrong business decision (e.g. by getting a second legal opinion on a subject).”
Therefore the two types of exceptional situations relate to a time criteria, the fact that the duplication could be justified if temporary, or to a business criteria, from which it derives that the duplication can be legitimate if driven by risk management considerations.
Once both exceptions have been taken into account, the TPG provides that the analysis must be completed on a factual basis. The examination must detail the nature of the services and the reasons why the entity has or has not received duplicate services. To demonstrate that services have not been duplicated, the company needs to show that “the intra-group services are different, additional, or complementary to the activities performed in-house.”
In parallel, the US definition of duplicative services uses different terminology and is more connected to the concept of benefit: “If an activity performed by a controlled taxpayer duplicates an activity that is performed, or that reasonably may be anticipated to be performed, by another controlled taxpayer on or for its own account, the activity is generally not considered to provide a benefit to the recipient, unless the duplicative activity itself provides an additional benefit to the recipient.”
It must be noted that the 2017 UN Practical Manual on Transfer Pricing for Developing Countries also defines duplicate services, in a similar fashion as the TPG, but it offers supplementary guidance compared to the OECD, that will be developed further on.