1.1. The payment of Management Service Fees ('MSF') is a necessary modern day feature of Multinational Companies ('MNCs'). Centrally coordinated services are required by MNC Group entities in order to maintain global standards, quality,
competitive edge, confidentiality, etc. and also to reduce cost.
1.2. Tax Authorities generally view the payments of MSF with suspicion. They routinely disallow the MSF payments by determining the Arm's Length Price ('ALP') as Nil on various grounds, such as, no services were received, no benefits were received, duplicative services were received, the services were in nature of shareholder activity, or only incidental benefits were received. According to the Tax Authorities no independent third parties would be willing to make payment for availing
management services, and so the ALP is determined as Nil.
This Article explores the issue of MSF, with the objective of empowering the Taxpayers to argue persuasively before the Tax Authorities in support of payment of MSF to foreign affiliates.
Specifically, this article discusses the following:
I. What Documents, Agreements, and Evidences should you maintain in order to:
- Prove the receipt of services, and
- Demonstrate ALP Benchmarking i.e. the payment made is at arm's length
II. How should you benchmark the payment of MSF?
III. What principles apply on the claim of payment of MSF to Foreign Related Parties (or Persons under Common Control or Associated Enterprises), and on determination of ALP of such payment?
IV. What counter-arguments can you make to rebut the Tax Authority's arguments?
The above points are discussed below.
Ideally, the following documents and evidences should be maintained.
a. Agreements - Clauses of the Agreement should specifically include the below mentioned information:
- Capability and Infrastructure of the Foreign RP to provide management
- Why the Taxpayer Entity needs to avail the management services?
- Detailed description of various services, and nature of services received from RP
- Mode of rendering and receiving of services
- Fees for the services and the basis of arriving at the fees
- Working of costs-allocations (Direct as well as Indirect charges), including allocation keys. Some examples of allocation keys are given below:
- The Agreement should clearly state these aspects: What exactly is provided by the RP? In what manner? And at what cost?
b. Wherever feasible, the following record of services received during the year may be maintained. Such record should preferably be contemporaneous i.e. as and when the services are received.
- Visits of RP's Personnel
- Trainings, Workshops, Seminars, etc. conducted by the RP
- Research Reports made available by the RP
- Expert Presentations shared by the RP
- Access to IT Systems, Websites, Databases, Intranet, etc.
- Screenshots of login by users of taxpayer entity
- Logbook of users of IT Systems, ERP, Accounting Systems, E-learning, etc.
- Certificates of Experts of RP
- Certificates from RP's Management
c. Evidence of the RP's Capabilities, Cost Centre, Infrastructure, etc.
- RP's Profit and Loss Account and Balance Sheet
- Certificate from RP's Auditors
- Certificate from RP's Management
d. Proof that Services were rendered by the RP
- Record of Personnel employed by the RP
- Costs incurred by the RP
- Assets and Infrastructure deployed by the RP
- Mode through which services were rendered by the RP. For example, emails, expert presentations, research reports, conference-calls, workshops, trainings, site-visits, recommendations, access to databases, etc.
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