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Intercompany Service Transactions Require Documentation and Back-up Documentation

30th March 2022

If we’ve told you once, we’ve told you 1,000 times, tax authorities are flagging intercompany service transactions as a means of base erosion and profit shifting, so you’d better have excellent documentation to backup any intercompany service arrangement. That means the required transfer pricing documentation and also, reports—contracts, invoices, emails, and so on—to support it.  Don’t believe us? In a recent court case in Spain, the National Court challenged the deductibility of intercompany services transactions because there was no written contract to substantiate it—and the court won.  

Here’s what happened: In 2008 and 2009, a multinational group that managed shopping centers had a Spanish entity that received intercompany management and marketing research services from a related party in Portugal. The Spanish tax authority opposed the tax deduction associated with the management fees because there was no proof of the service—in other words, there was no intercompany agreement. Why not? The taxpayer claimed to have lost the contract—a costly mistake. In fairness, the taxpayer did submit a document describing the service, but it wasn’t enough to please the court. In fact, the court claimed that the evidence the company did provide was insufficient: the invoices were too generic, and they referenced a contract that didn’t exist (“services provided according to contract February 2008”), internal correspondence supported ordinary relationships, and so the court agreed with the tax authority—evidence of an intercompany service transaction was lacking and therefore, the deductibility was denied.  

The lesson? Intercompany service transactions are seen as risky business by tax authorities, so expect examinations—and be ready for them. Prepare robust transfer pricing documentation, conduct thorough comparability analyses that support the need for the services and the business arrangement, and make sure you have an intercompany contract that defines the services and the responsibilities between the two parties—and as we learned from this particular taxpayer, make sure you know where that contract is.