Intragroup services in the context of tax rules in the reality of the functioning of capital groups

This article is devoted to intragroup services under Polish regulations, international regulations and practices of trading between companies belonging to international capital groups. In particular, the author considers the relationship between the scope of the concept of intra-group services used in the light of the OECD Guidelines and the concept of low value added services in the sense developed in Polish regulations.

Introduction In the context of growing interest in clearing transactions in capital groups, it is increasingly important to understand correctly the concepts related to the execution of transactions that are actually only present in the realities of capital groups or groups of affiliated companies. one of these terms is the term ‘intergroup services’.

The concept of intragroup services is not defined in the system of Polish tax law. Regulations of Polish laws on income taxation[1], In particular, transfer pricing rules for transactions between related parties are based on a concept that undoubtedly refers to intra-group services, but that is not synonymous in any case. In the income tax laws, the legislator introduced the concept of ‘low value-added services’.

Low value added services

For example, on the ground Article 11f amended corporate income tax law[2] specific, dedicated solutions are provided for services with low added value. In the case of the concept of low value added services, the income tax laws specify the conditions to be fulfilled in order to qualify intragroup services as low value added services:

• 1) they are services supporting the business of the recipient;
• 2) are not the main business of a group of related entities;
• 3) the value of these services provided by the service provider to unrelated parties does not exceed 2% the value of these services to related and unrelated entities;
• 4) they are not subject to further disposal by the customer, excluding the sale of services purchased in their own name, but to another related entity (refacturing).

Polish regulations therefore place a clear emphasis on the nature of services which can be recognised as low value-added services – these are services which are always of an auxiliary nature, supporting the business activity of a given entity. This must not be a service which constitutes a basic operational activity from which the company derives its fundamental benefits.

On the basis of Polish tax rules, after the amendments made, the question of the classification of a given service as a low value added service is further regulated by indicating In the Annex to the Law list of categories of benefits which may be treated as low value-added services[3]. Therefore, the identification which intra-group services may be regarded as a service of low added value should not, apart from specific cases, create greater difficulties.

Intragroup services in the light of OECD Guidelines

On the other hand, the question of the definition of intra-group services, which is increasingly used when dealing with transactions between entities belonging to the same groups, remains unordered (we are deliberately omitting an explanation of the concept of a capital group or a group of related entities, as this is an extensive material requiring a separate analysis). In an attempt to summarise current practice, it can be concluded that in many cases intra-group services are referred to as all types of services provided between entities belonging to a group of capital/group of affiliated entities.

It is clear that the very definition of intragroup services is essentially closely linked to transactions carried out in groups of companies. Looking for a source of such a concept for widespread use, the Guidelines of the Organisation for Economic Cooperation and Development (OECD) should be consulted[4], where a separate chapter on intragroup services entitled Special Considerations for Intra-Group Services is published.

While the OECD Guidelines also do not provide a clear definition of the concept of intragroup services, this publication contains many helpful indications on how to identify intragroup services.

In turn, the very concept of low value-added services is contained in Part D of Chapter VII of the OECD Guidelines, which identifies the characteristics of this category of benefits (ancillary characteristics, do not constitute a ‘core business’ of the company, do not require the involvement of unique inputs, do not entail any particular risk on the supplier side); and an example catalogue of these services is indicated.[5].

As regards the concept of intra-group services itself, as indicated in the introduction to that chapter of the OECD Guidelines, it concerns situations where services are provided by one of the companies belonging to an international group to another company belonging to that group[6].

Such a wording would suggest that the concept of intra-group services can indeed be interpreted quite widely, covering almost all services provided "inside" by the group.

However, the following point of the Guidelines already indicates examples of services to be covered in the context of intra-group services, specifying that in particular they are administrative, technical, financial, advertising services.

Such calculation is exemplary, but would indicate that the catalogue of intragroup services is limited in some way – this example catalogue contains services of ancillary nature, which is similar in nature to those mentioned in Polish legislation for services with low added value.

The OECD guidelines for intra-group services focus on them properly two aspects:

• how to determine whether the services have actually been performed; and
• how to determine the remuneration for these services for tax purposes in the light of the so-called arm length principle (price fixing at market level).

There is no doubt that Polish rules on the application of the arm length principle are based on OECD solutions. The legal nature of the OECD Guidelines and the possibility of using this publication is quite specific. The OECD Guidelines do not in any case form part of the Polish legal order, but according to point (e) The content of the subject and the relatively small case law in this regard are a kind of a catalogue of good practices, or the basis for the whole thinking process[7].

The Polish legislator has not decided to directly allow the OECD Guidelines as a formally applicable source, as is the case in some other legislation which implements market-level pricing arrangements in accordance with the arm length principle.

On the other hand, income tax laws contain elements which indicate that the legislator also intended to use the OECD Guidelines to some extent, which is clearly expressed in the case of statutory delegations to issue regulations, including as regards elements of tax documentation: The Minister responsible for Public Finance will, by means of a regulation, determine the specific scope of elements of the local transfer pricing documentation and group transfer pricing documentation, with a view to facilitating taxpayers to draw up correct transfer pricing documentation and taking into account the guidelines of the Organisation for Economic Cooperation and Development on Transfer pricing for multinationals and tax administrations[8].

This is not, of course, the explicit acceptance of the OECD Guidelines as a source of common law, but is an important interpretative clue.

However, it still seems – addressing the possibility of applying the OECD Guidelines directly to intra-group services and low value-added services – that it has been sufficiently high exhaustive regulated by the Polish Income Tax Laws, that the need to interpret provisions concerning the scope of services with low added value by referring to the content of Chapter VII of the OECD Guidelines will rather be about exceptional situations. Since the provision of the Polish Act indicates sufficiently precisely what kind of services should be treated as a service with low added value, there is no need to use the OECD Guidelines in this respect, in particular, this should not constitute an indication of a different catalogue of such services.

Reasoning for the amendment to this effect 1 January 2019, The author of the new rules clearly indicated that, given the relatively general nature of the OECD guidelines and the lack of direct transfer of their content to statutory regulations, it was necessary to regulate the scope and nature of the services in question in a more precise way, which would exclude possible interpretational doubts.[9].

As a result of the introduction of a safe Harbour solution for low value-added services, it was necessary to specify as far as possible which categories of benefits would benefit from such solutions, and it was therefore considered necessary to introduce the above-mentioned additional criteria (including the two percent criterion on the value of such services and the non-resale criterion).

An additional argument to which attention is drawn in this respect is the fact that statutory delegations to issue regulations by the Minister of Finance, which are contained in the content of Polish tax laws, do not refer to provisions on services with low added value, but only to the extent of information contained in local documentation and the elimination of double taxation[10].

Summary

In my opinion, the national legislature, when introducing regulations on intra-group services, created the concept of low added value services.

The Polish concept of low value added services is narrower than the concept of intra-group services in the taxation of international groups of related companies.

The concept of intra-group services can be considered two basic planes:

• under the OECD Guidelines, then they should be interpreted in accordance with Chapter VII;
• in the sense of common language – in this case, we can talk about a wider catalogue – basically any services that are carried out between entities belonging to the group.

Consequently, It can be concluded that when we talk about intra-group services in the context of the principles of determining transaction prices, we will refer to this concept within the meaning of the OECD Guidelines and Polish tax rules, and therefore, if we are dealing with a situation on Polish soil, it will be more correct to apply the concept of services with low added value and relevant provisions of the Polish law. As indicated above, Polish provisions according to the intention of the legislator were formulated quite precisely in this respect.

It is expected that the question of the qualification of a particular type of service in the catalogue of low value added services will become quite relevant in the coming years, given that it will depend on the possibility of applying the Safe Harbour regulation, and thus the need for comparative analyses and the adoption by the taxpayer of the statutory levy (currently at the level of 5%) and the tax authority refraining from determining the taxable person’s income (loss) as regards the amount of the charge on the costs of those services, if the statutory conditions are met.