Fintech Law - Mexico

Last week Mexican Financial Regulators: the Commission for the Protection and Defense of Financial Services Users (CONDUSEF), the National Commission System for Retirement Savings (CONSAR)  published the draft Bill to Regulate the Institutions of Financial Technology, better known as the “Fintech Law”.

The Fintech Law will regulate the creation and operation of the Financial Technology Institutions (ITF).

Under the Fintech Law, all the new ITFs will carry out activities and operations where technology is fundamental by easing and making money-related transactions more straightforward, beyond creating the platform to exchange products and services by means of virtual assets.

Under the preliminary Fintech Law draft bill, there are three types of ITFs:

a) Crowdfunding Institutions, which will provide access to sources of financing to markets that are not served by the financial ecosystem, thus generating greater financial inclusion at reasonable costs;

b) Institutions of Electronic Payment Funds, which will help to make efficient the exchange of products and services, strengthening the economy of the country. In both cases the possibility exists that the operations carried out are carried out in national currency, foreign currency or in virtual assets; always following the guidelines set by the Mexican Central Bank (Banxico) and other financial regulators, including all the relevant requirements under AML rules; and

c) Virtual Asset Management Institutions: These contact third parties through digital means in order to buy, sell or dispose of their own or third party’s virtual assets, and receive virtual assets to make transfers or payments to any person, including another Virtual Asset Management Institution. Under the Fintech Law, virtual assets are those digital units that have similar uses to those of the Mexican peso, as determined by Banxico under certain criteria it will take into consideration.

Furthermore, another Fintech Law’s highlight is its contribution towards the possibility of carrying out operations under new business models, such as big data, crowdfunding, cryptocurrency, e-money, regulatory sandboxes, robo-advisory and application programming interface (API).

If the Law comes into force as under the draft’s form, ITFs will have to be incorporated as a Mexican corporation (sociedad anónima de capital variable) or limited liability company (sociedad de responsabilidad limitada de capital variable) in order to render services in Mexico. This means, for foreign financial services providers, the need to incorporate a subsidiary in Mexico versus rendering services from a branch or any other type permanent establishment.

All ITFs will have to obtain prior authorization from the Securities Commission (CNBV), together with an opinion from the Committee on Financial Technology Institutions (as proposed by the Fintech Law).

Those ITFs which are already providing services in Mexico will have to obtain the CNBV’s authorization in order to continue operating as such.

In this sense, in order to be authorized as ITFs, companies must certify to the CNBV that:

• ·    the transactions they wish to carry out are expressly foreseen within their bylaws;
• ·   they have the appropriate governing bodies and corporate structure to carry out their operations; and
• ·  they have the necessary infrastructure and internal controls such as operating, accounting and security systems, offices, as well as the respective manuals.

The CNBV will publish the authorizations it grants on a public registry and on the CNBV’s website.

The next steps are that the finance and banking community should provide its feedback on the initiative; then the draft bill will be revised introduced to Congress whom, will make any adjustments and if passed, the bill will be enacted.

Summary - BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances.

The OECD aims to prevent BEPS through improper use of international treaties. For this reason, the OECD is currently revamping the Model Treaty Convention (MTC) so that it includes:

- A clear statement in bold letters that the treaties are executed by the Contracting States with the intention to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

- Specific anti-abuse rule in the form of a limitation of benefits (LOB) clause that limits the availability of treaty benefits to entities with certain conditions (among others; legal nature, ownership in and general activities carried out by the entity). This also seeks to ensure that there is sufficient link between the entity applying for treaty benefits and its country of residence.

- Provisions aiming to target transactions that escape from treaty shopping situations but which still create treaty abuse, the OECD recommends to establish a general anti-abuse rule (GAAR) based on the ‘principal purpose test’ (PPT) which analyses the main purpose of the transactions or arrangements. This kind of provisions will be incorporated in the MTC. Under this GAAR, if one of the principal interests is to obtain the treaty benefits, these benefits will be denied, unless proven otherwise. Burden of proof will rely in the taxpayers’ side.

Specifically, on fighting treaty shopping, the OECD insists in revisit the definition of ‘beneficial owner’ introduced in the MTC of 1977 and the concept of ‘improper use of the convention’, among others, to address cases of ‘conduit company transactions’.

The OECD proposes a text for a new Article of the MTC, which will comprise the scope of ‘Entitlement to Benefits’. This new Article will define in detail who is and who is not entitled to the benefits of the treaty. This seeks to deny treaty benefits in the case of structures that may result in the incorrect granting of treaty benefits.

Among the concepts that this new Article will define is the concept of ‘qualified person’, which includes:

- Governments and governmental agencies

- Charitable organisations

- Certain publicly traded companies

- Individuals resident in the particular jurisdiction or Contracting State

Regarding corporations, it will be harder to be recognised as a qualified person since it will be necessary to demonstrate that its equity is owned, in at least 50% by an individual resident in that Contracting State. This aims to evidence the sufficient link of the corporation with that jurisdiction in which it resides. 

Mexico Tax Reform - 2016

Last November 18^th, 2015, it was published in the Official Gazette the tax reform package for 2016. The 2016 tax reform includes changes to the Federal Tax Code (Código Fiscal de la Federación)  and Income Tax Law (Ley del Impuesto sobre la Renta) in connection with tax measures included in the Budget proposal for 2016 (Ley de Ingresos 2016).

Below is a brief summary of the most relevant approved changes:

	transfer pricing (TP) information returns. These new information returns for TP purposes follow the requirements developed and agreed by the OECD members under the Action Plan on Base Erosion and Profit Shifting (BEPS). Against this background, Mexican entities will be required to prepare: – a Master File; – a Local File; and – a Country-by-Country Report (applicable to entities earning at least EUR 750 million annually). These TP information returns will be mandatory starting from fiscal year 2016 and must be filed before 31 December 2017. Non-compliance will be subject to penalties ranging from MXN 140,540 to MXN 200,090;
	immediate deduction available for fiscal years 2016 and 2017 of investments made in new fixed assets in the energy, infrastructure and transportation sectors. This  deduction will be available for entities with income up to MXN 100 million;
	riddance of the application of thin capitalization rules to debts incurred in relation to investments for the generation of electricity;
	riddance of some restrictions regarding deduction of fringe benefits granted by an employer to its non-union workers;
	4.9% withholding tax on interest paid to non-resident banks, provided that the bank in question is the beneficial owner of the interest and is resident in a country with which Mexico has a tax treaty in force;
	tax amnesty through an incentive consisting of waiving of penalties and surcharges and granting of tax credits in view of payment of taxes abroad, for entities and individuals repatriating capital (including capital located in low-tax jurisdictions), provided that certain conditions are met; and
	an incentive granted to Mexican individual shareholders consisting of a tax credit for reinvested profits derived between 2014 and 2016. The tax credit will be applicable against the additional withholding tax of 10% on dividends and will be calculated as follows: – 1% on distributed dividends in 2017; – 2% on distributed dividends in 2018; and – 5% on distributed dividends as of 2019. The tax credit will not be considered taxable income for income tax purposes.

The tax reform will be applicable as from January 1^st, 2016.

State aid and specific fiscal aid measures in the context EU Law.

The EU Commission Notice on the notion of State aid pursuant to Article 107 (1) of the Treaty on the Functioning of the European Union (TFEU) aims to be a tool that helps Member States (MS) to clearly identify the key concepts regarding State aid within the EU laws, by simply clarifying how it understands these treaty provisions in line with the interpretation given by the European Court of Justice in its case law.

Summary of Specific Fiscal Aid issues mentioned in the Notice.

As part of the manner in which MS decide to structure their fiscal policy, the Commission has identified the main pillars of tax policy that might fall under the concept of State aid:

1. Cooperative Societies. Type of undertaking with special membership requirements, whose assets and benefits are not distributed to outside shareholders and must be dedicated to the common interest of the members. MS tend to provide special tax treat due to the fact that these are undertakings that are not in a comparable factual and legal situation from the standard commercial undertakings.
2. Undertakings for collective investments. Undertakings that perform as intermediaries within investment transactions, placing themselves between the investors and the targets of investment. MS intend to give these undertakings a fiscal treatment that follow the objective of achieving tax neutrality, so that any investment transaction carried out through them gets the same amount of tax liability that an investment carried out directly by the investor.
3. Tax amnesties. Waivers of MS regarding unpaid amounts of tax by undertakings. The amnesties seek compliance of undertakings on their tax obligations. Should be exceptional, temporary, open to any type of undertaking and to any type of sector.
4. Tax settlements and rulings. (i) Tax settlements are the result of a dispute between tax authorities and taxpayers regarding amount of taxes owed; (ii) Tax rulings are administrative interpretations of tax laws by tax authorities to provide certainty, in advance, to taxpayers, regarding the application and interpretation of tax laws e.g. advance pricing agreements. Both tax settlements and tax rulings must fulfill certain conditions in order to be compliant with State aid rules.
5. Depreciation/amortization rules. These are technical rules within a tax system that apply in the calculation of the value of assets through their economic lifetime aiming to assess the financial situation of an undertaking. These rules must follow a benchmark and should not be favorable to certain undertakings on a selectivity basis. 
6. Flat rate regimes. System to apply lower tax burden to undertakings in certain industries or with certain economic size e.g. agricultural undertakings justified for the lower administrative burden implied in the calculation of a flat rate tax compared to a conventional tax rate.
7. Anti-abuse rules. Specific tax rules aimed to counter tax evasion. If applied, should not be derogated for certain undertakings or for certain transactions on a selectivity basis. Its application should be general.
8. Excise duties. Special taxes on certain products or sectors that should not be reduced by MS in order to favor certain undertakings.

In my personal view, the most sensitive specific fiscal aids that MS might be incurring into are the ones related to administrative tax rulings.

The Commission makes reference to the administrative tax ruling in a broad manner. In general terms, it only offers an example of a case for the issuance of an administrative ruling being the one for setting the arm’s length profit in an intragroup transaction or controlled transaction. Also, the Commission states that tax rulings might represent a challenge from a State aid viewpoint in (a) the absence of publication of the tax rulings and (b) in cases where the tax administrations get room for maneuver.

On the one hand, the first issue (a) is something that should be addressed in a relative straightforward way by making sure that MS administrative regulations provide for a transparency policy in terms of the publication of the tax rulings granted to any and all taxpayers. Furthermore, in the context of global trend on tax transparency, creating a harmonized system where tax administrations of all EU MS share the tax rulings that have granted should be something that must be seen as the only destination under international legal instruments like the OECD Convention on Mutual Administrative Assistance in Tax Matters.

However, on the other hand, the second issue (b) is something far more complicated to attend. Considering that, in essence, a tax ruling is the expression of how a tax administration understands and interprets relevant tax provisions, I can’t hardly see how can a tax ruling can be issued without, what the Note mentions is “room for maneuver”.

In addition to the above, the Note states that there will be deemed selectivity in the issuing of the tax rulings when, among other situations, the tax authorities have discretion in granting administrative tax rulings. 

The problem is that the sole essence of the tax ruling relies upon the discretion and room of maneuver that the tax authorities should have in order to interpret and understand the relevant tax provision. Without these two elements (discretionarily and room for maneuver in the interpretation), tax authorities will not be able to produce tax rulings, because they would be (1) obliged or vetted to issue the tax rulings and (2) subject to a fixed criteria regarding the interpretation of tax provisions.

Another different thing would be that tax administrations apply different interpretation of the same relevant tax provision to undertakings that are placed in the same legal and economic situation.

Against this background, last October 21st, 2015, the Commission made public two important State aid decisions regarding tax rulings; these are the once concerning Starbucks Manufacturing in the Netherlands and Fiat Finance and Trade in Luxembourg. The Commission declared in both cases that the tax rulings were considered to constitute unlawful State aid within the context of Article 107 (1) of the TFEU taking the view that the methods endorsed by the tax authorities in the Netherlands and Luxembourg to establish the companies’ taxable profits do not reflect economic reality and amount to a selective advantage against these companies’ competitors.

I think is not out of context to say that these decisions have created significant legal uncertainty for multinational companies that have relied on tax rulings in Europe.

My suggestion is that the Commission should be more clear regarding the conditions under which the discretionarily and room for interpretation might become an element of selectivity when a tax administration issues a tax ruling and hence contravene EU’s State aid rules.

BEPS Action 6: Preventing Treaty Abuse

I.                Background

The OECD Base Erosion and Profit Shifting (BEPS) Action Plan identified diverse issues regarding the manner in which multinational enterprises (MNEs) conduct their business in cross-border transactions. Among the issues that the BEPS project identifies we can find treaty abuse. Particularly,  BEPS project, in its Action 6, addresses to treaty shopping as one of the most important sources for BEPS concerns.

MNEs and other taxpayers that engage in treaty shopping and other treaty abuse strategies undermine countries’ tax sovereignty by claiming treaty benefits in certain circumstances under which these benefits were not intended to be granted. This leads to deprive contracting stets from tax revenues.

In other words, treaty shopping aims to obtain treaty benefits so that the applicant can obtain a reduction of withholding tax (WHT) in the source state through the application of the provisions of the tax treaty without being entitled to them. Generally, this practice could be achieved through the interposition of conduit vehicles such as legal entities like companies, partnerships or trusts, depending on the jurisdictions. These entities need to be resident in certain state which has concluded a specific tax treaty that becomes beneficial to another taxpayer resident in the state in which the income is obtained. Thus, treaty shopping is no other thing than the use of tax treaties by persons who are not themselves within the personal scope of the treaty itself.

In this regards, under the Action 6, the OECD released a report in September 2014 which contained two approaches to counter the effects of treaty shopping. One of the approaches was based on the principal purpose test (PPT), which would aim to deny treaty benefits if there was a view by the tax administration of a contracting state that the principal purpose of the transaction was obtaining the benefits of the treaty.

The second approach was the inclusion of a limitation of benefits (LOB) clause, following the one already applied by the Unites States (U.S.) its tax treaties, where only certain defined resident taxpayers are eligible to get the relief from the treaties.

In November 2014 with a set of recommendations to address this issue through changes in the OECD Model Treaty Convention (MTC) and the MTC Commentary. This deliverable was issued as a discussion draft and titled “Follow up work on BEPS Action 6: Preventing Treaty Abuse (Discussion Draft).

The above Discussion Draft (DD) included the works of the Working Group on the potential changes to the MTC and the Commentary.

On January 22nd, 2015, a public consultation was held. The relevant stakeholders provided with their comments and on March 2015, a follow up meeting was held.

On May 21st, 2015, the Working Group undertook further consideration on the comments received through the public consultation and the follow up meeting. Additional comments were received by the Working Group in June 2015.

The Working Group issued the Final Report on October 5th, 2015, reflecting the conclusions to which the Working Group arrived, together with some recommendations on how to include changes to the MTC provisions and the Commentary.

The Final Report was titled: “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”. These circumstances were identified as: (i) Cases where a person tries to circumvent limitations provided by the treaty itself; and (ii) Cases where a person tries to abuse the provisions of domestic tax laws using treaty benefits.

The Final Report is divided into three sections:

1)    Section Aà Which includes anti-abuse provisions to provide safeguards versus the abuse of treaty provisions. The report notices that countries have reached agreement in setting a minimum standard of protection against treaty shopping, so it includes additional targeted rules to be included in the tax treaties addressing other forms of treaty abuse such as (i) dual resident taxpayer situations and (ii) Permanent Establishments (PEs) situated in a third state situations.

2)    Section Bà Contains provisions for a revised title and preamble of the MTC in order to clarify that the intention of the countries and the treaty itself is to prevent double taxation but without creating opportunities for tax planning aiming double   non-taxation through tax evasion or avoidance, including treaty shopping arrangements.

3)    Section C àIdentifies some tax policy considerations which should be relevant for the decision of countries to enter into a double taxation agreement with another country.

Finally, the Final Report stresses the fact that further work needs to be done under Action 6 in order to ensure effectiveness of the recommendations regarding MTC provisions and Commentary changes. The areas that require further work have been identified in the Final Report and are the following:

-        1) U.S. style LOB clauses to prevent treaty shopping, which are expected to conclude during the first half of 2016; and

    2) Treaty entitlement of benefits of non-collective investment vehicles (non-CIVs) and pension funds. The works on this topics are also aimed to be concluded during the first part of 2016.

II.                Action 6 objectives.

      The Final Report notes that there has been reached agreement among countries regarding the minimum level of protection against this practice of treaty abuse (the minimum standard). This agreement has led to have commitment within the countries to include a clear and express statement in the treaty’s wording that the common intention of the countries to enter into these type of treaties is to prevent double taxation and to promote international cross border commerce and not to create opportunities for non-taxation or reduced taxation. Hence, they would be openly rejecting the use of the treaties for tax evasion and avoidance through treaty shopping and other arrangements alike.

III.              OECD’s proposal.

Taking the above into account, the Final Report insists in drafting a clear statement to be included in the MTC that the contracting states are only entering into the tax treaty in order to prevent double taxation and to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements will be included in tax treaties.  

Furthermore, the Final Report notes the need to implement specific anti-abuse rules through an LOB clause that limits the availability of treaty benefits only to certain entities that meet certain criteria. This LOB clause will be included in the MTC. In addition, the Final Report makes clear the need to release guidelines on how to identify these conditions, insisting on targeting the legal nature of the entity requesting the treaty benefits, its ownership structure, and general activities of the entity. This will help contracting states to ensure that there is a sufficient and strong link between the entity requesting the treaty benefits and the residence state.

Regarding other forms of treaty abuse including treaty shopping situations that would not be covered by the above described LOB rule, the Final Report notes the need of a general anti-abuse rule based on the principal purpose of transactions or arrangements, thus, insists on the use of the PPT rule. The PPT rule will be included in the MTC and will aim to deny treaty benefits in those cases where one of the principal purposes of transactions or arrangements is to obtain treaty benefits. There would only be possible to obtain treaty benefits if it is established that granting these benefits would be in accordance with the object and purpose of the provisions of the treaty.

IV.            Personal view.

In my experience as tax adviser, the inclusion of LOB clauses has proven to be the most effective measure to prevent treaty abuse, since it makes very hard to prove that the entity requesting the benefit of the treaty has a strong link with its country of residence if it is letterbox or shelf entity. This is because the LOB clause requires, among others, that the entity’s ownership (at least 50%) has to be in the hands of residents in the same country.

On the other hand, the recommendation of a clear statement in the preamble of the MTC that the intention of the treaty is not to make room for tax planning opportunities aiming treaty shopping seems a bit naive and hardly effective.

Base Erosion and Profit Shifting - BEPS -Summary

The debate over BEPS tax planning strategies has reached last few years the front pages of the newspapers (i.e. Luxembourg leaks, Apple, Starbucks) and also the agendas of the OECD and non-OECD member countries governments. Upon request of the G20, the OECD published in July 2013 a document identifying the 15 Actions through which these BEPS tax strategies can be tackled. These 15 Action Plans are focused on :

1. establishing coherence in international taxation,
2. aligning taxing rights with substance and
3. improving transparency.

In essence, the BEPS project pretends to align taxation with activity. Companies should be taxed in the country/ies in which the activities are developed.

Recommendations to modify domestic law and tax treaties

The outcome of the BEPS projects would be the deliverable of recommendations per each of the 15 detailed Action Plans. Part of these deliverables has been published in September 2014 while others will be published in September and December 2015.

The BEPS recommendations will be modifications of domestic tax laws of each country or their bilateral tax treaties. 

Also a multilateral instrument will be developed in order to swiftly implement the tax treaty related BEPS measures in a rapid and consistent manner with respect to potentially more than 3000 tax treaties currently in force.

The G20 endorsed during various recent occasions the BEPS action plans and is pushing all developed countries and also developing countries to participate. Already 60 countries participate to the BEPS project.

Tax professionals have expressed their concerns regarding the uncertainty of timing and level of implementation of the BEPS recommendations by each of the countries in the foreseeable future. While there are countries that are already introducing tax reforms in line with BEPS initiatives, other countries may postpone such implementation and / or may only partially implement recommended adjustments.

Impact to many tax planning structures

The implementation of the BEPS recommendations will be a game changer in international taxation. The BEPS project would not only spread its effects on the biggest multinational groups such as Apple or Starbucks, it would also affect almost all the multinational groups (i.e. groups with entities in more than one jurisdiction).

Holding, royalty and finance structures which lack economic substance and are set up for treaty shopping purposes may be impacted by the recommended introduction of Limitation on Benefits provision (LoB) and/or the Principle Purpose Test (MPT) in tax treaties. Hybrid mismatch arrangements and thinly capitalised entities will be combatted. 

Transfer pricing structures the allocation of taxable profits needs to be aligned with economic activities and value creation in the respective countries. Aggressive structures have to be disclosed and transfer pricing transactions needs to be properly documented and filed to give tax authorities more transparent information. 

TRANSFER PRICING & INTRA GROUP SERVICES

Almost every Multinational Enterprises Group (MNEG) must arrange for a wide scope of services to be provided and availed to the entities in its organization. Examples of these are commercial, administrative, financial, technical and legal services.

These services might also include management, coordination and control functions applicable within the whole group.

The cost of providing such services may be borne by the parent company; by a dedicated member entity such as a ‘group services center’ or by any other member of the group.

When realizing about the need of service, an independent company usually considers two options: (i) if the service needed should be hired from an external source; or (ii) if it can be done in-house.

The same exercise should be made by a group company in the way that the services can be performed in-house or received from a fellow member group company.

In light of the above, it is more likely than not that services like accounting and legal advice are hired from an external party; when services like central auditing, financing advice or staff training are performed internally.

In some cases, intragroup services arrangements are linked to arrangements for the transfer of property of tangible or intangible goods, or the license for the latters. Some other times, there are cases where know-how is obtained resulting from a services agreement. This cases are particularly complex when attempting to determine where the exact border lies between the transferring and licensing of property, on the one hand, and the transfer of a service on the other.

MAIN ISSUES

There two main issues in the transfer pricing analysis for intragroup services:

(i)                  Have intra group services been rendered?

Under the arm’s length principle, the answer to the above question depends on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position.

This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed itself in-house.

If the activity is not one for which the independent enterprise would have been willing to pay or performed in-house, then the activity would ordinarily should be considered as an intra-group service under the arm’s length principle.

When a service is provided by a group member to meet identified need of one or more specific fellow group members, it is relatively straightforward to determine if an intragroup services has been provided. Commonly yes, because it is something that an independent enterprise would have hired from an independent party or would have provided for itself in-house.

A more complex analysis is required when a group member (usually the parent company or a regional holding company) performs an activity solely based on its ownership interest in one or more other group companies, i.e. in its capacity as shareholder.

This type of activity should give basis to justify any charges to the recipient companies and it may be referred to “shareholder activity” (which is different from the so called “stewardship activity” which is a broader term that would also include the provision of services like the ones provided by a coordination centre).

The following are examples of shareholder activity that should give rise to any charge to the recipient enterprise:

-          Costs of activities relating the juridical structure of the parent company itself, such as meetings of the shareholders of the parent; issuance of shares in the parent company and costs of the supervisory board;

-          Costs relating to reporting requirements of the parent company including the consolidation of reports; and

-          Costs of raising funds for the acquisition of its participation in the recipient company.

In contrast, if for example, a parent company raises funds on behalf of other group member enterprise which uses these funds to acquire a new company, then the parent company would be entitled to charge as it will be considered to be providing a service (e.g. broker or funds raiser).

Another type of these shareholder activity are the costs of managerial and control (monitoring) activities related to the management and protection of the investment such as participations.

Another issue regarding intra group services that is worth to comment on is the concept of “services on call”. This type of services require that the services provider dedicates and keep available specific resources (e.g. employees, equipment, etc.)  in order to be on a standby mode so that the potential recipient of the service can get the provision of said services on a faster manner. An intra-group service would be deemed to exist if to the extent that it would be reasonable to expect an independent enterprise in comparable circumstances to incur in some “stand-by” charges to ensure the availability of the services when the need for them materializes.

(ii)                How can the companies determine an arm’s length charge for said services?

Once determined that there has been an intragroup service rendered, it is necessary to verify that the consideration or price charged for said services was set in accordance to the principle of arm’s length.

This mean that the charge for the intragroup service should have been that which would have been made an accepted by independent enterprises in comparable circumstances.

To identify the amount (if any) that was charged to the recipient of the service, the tax authority will need to identify what arrangements (if any) have actually been put in place between the associated enterprises to facilitate the charge made for the provision of the service between them.

There are certain cases where the multinational enterprises group uses the “direct charge method. This method is where the associated enterprises are charged for specific services, in those cases where the arrangements can be easily identified.

Direct charge method can certainly and clearly be used where there are specific services provided by a group member whose core business is providing these services to independent parties as well.

But direct charge method is not always feasible to apply and MNEG have to incur in alternative methods when dealing with services provided by a parent company or group member service centre.

In these cases, the practice of MNEG for charging for intragroup services is often to make arrangements that are either (i) readily identifiable but not based on a direct-charge method; or (ii) not readily identifiable and either incorporated into the charge for other transfers allocated amongst group members in same basis or, in some cases, not allocated amongst group members at all.

When calculating the arm’s length consideration the matter should be considered from both the perspective of the services provider and the services recipient.

In this respect, relevant considerations include the value of the service for the recipient and how much comparable independent enterprise would be prepared to pay for that service in comparable circumstances as well as the costs incurred by the services provider, considering that a services provider will most likely provide the service for a consideration higher than its cost, so that it can make a profit out of it.

The method to be used to determine the arm’s length price should be one that has the support of the OECD thorough it transfer pricing guidelines, such as the CUP (Comparable Uncontrolled Price) or the Cost Plus Method.

It may be required the elaboration of a functional analysis of then various members of the group in order to establish the relationship between the relevant services and the relationship between the relevant services and the member’s activities and performance.

In addition, it may be necessary to consider not only the impact (immediate impact) of a service, but also its long-term effect, bearing in mind that some costs will never actually produce benefits that were reasonably expected when they were incurred into.

Determining the method will depend on if the charge is such as it results in a profit for the service provider. As said before, in an arm’s length deal, an independent provider would normally seek to charge for services in a way as to generate profit rather than providing the services merely at cost.

The economic alternatives available to the recipient of the services also need to be considered.

In addition, sometimes the market value of intra-group services is not greater than the costs incurred by the provider. This could happen when the services are not within the ordinary scope of activities of the provider, but they are still offered incidentally as a convenience for the MNEG.