Recently, intangible services have been one of the most frequently reviewed areas during tax audits.
In our experience, the authorities require the taxpayer:
Our practice in transfer pricing audits shows that the authorities also expect:
- Justification of the benefits of receiving services provided by the group entity/entities,
- confirmation that the amount of costs incurred corresponds to the benefits achieved.
Verification covers both intragroup services and those purchased from unrelated parties.
The authorities are also seeking answers to the following questions:
- Have the services actually been performed?
- What was the exact scope and progress of the services (correspondence between the scope of the contract and the work actually performed and how the work was performed)?
- Did the service provider have the team, competence and other resources needed to perform the services?
- Is the purchase of services rational from the taxpayer’s economic perspective (i.e., were the services needed, could the economic objective be achieved better or cheaper)?
Why is this important?
In the absence of adequate evidence, the authorities question the inclusion of expenses in deductible expenses, which in turn translates into an overestimation of taxable income.
For services of significant value, it will be advantageous for the taxpayer to prepare in advance a summary of the scope, benefits and evidence of the service in question.
Preparing such a summary saves time, reduces audit costs and sends a clear signal to the tax administration that the taxpayer is pursuing a transparent tax strategy.
Remember
Preparation of a benefit test is also mandatory for controlled transactions carried out with entities from so-called tax havens. This is because the economic justification of such transactions has become a mandatory element of local transfer pricing documentation since 2021.
How can we help you?
Therefore, it is worthwhile to analyze transactions and purchased services in advance, both intra-group and with unrelated parties.
- We will verify your ongoing transactions (before, during, or after) for services and prepare a summary including the category of services purchased, their economic rationale, and their relationship to revenue.
- In cooperation with you, we will collect and summarize evidence of the services performed.
- We will identify possible areas of risk and verify the accuracy of the materials shown.
- We will support and/or represent you during benefit tax audits of the test, including in terms of explaining the reasonableness of the costs incurred, their marketability and their relation to revenues.
- We will draft or revise service contracts, description to invoice, and related transaction documentation to address issues relevant to the benefit test.
- We will prepare an instruction/procedure to show you how to collect and describe evidence of the transactions and demonstrate the economic benefits derived from them.
- We will support you in preparing a system for archiving the evidence you collect, and even develop a tool to automate the process.
- We will conduct a training course for you, during which we will present the issue of the benefit test and indicate what approach should be taken in this regard, taking into account the specifics of your transactions.
- We will prepare an application for an advance pricing agreement (APA), in which we will include a benefit test, in order to justify the economic justification of the implemented transaction.
Benefits:
- Reduce the risk of tax authorities questioning the inclusion of expenses for intragroup services and from unrelated parties (especially intangible services) in deductible expenses.
- Ongoing collection of evidence of service performance will save you time (collecting materials several years after the transaction would be problematic and time-consuming).
- During inspections, the authorities ask not only for documents confirming the effect of the work (such as reports or opinions), but also for working materials, project correspondence or time records. And yet the inspection may concern a period going back as far as 6 years!
- Completing evidence and service reports with our support will make it easier for you to focus on those issues that are most often reviewed by tax authorities.
- Benefit test can be used during the advance pricing agreement (APA) procedure.
- Benefit testing is also a great tool for management and controlling purposes. The data collected allows analysis of the company’s expenses and increases awareness of exactly what services it buys and what benefits it provides.
Our selected experiences
Leading real estate
investor
We have represented and supported a client during a tax audit. Based on this, we know what documents the tax authorities expect and we take these expectations into account when analyzing the benefit test at our clients and advising them in this area.
Automotive
customer
Within the framework of business cooperation with the Client, we prepared a benefit test, summarizing the group services implemented with demonstration of their economic rationality, areas of risks and benefits. We also supported clients in collecting and presenting evidence of their performance.
Financial
industry client
For a client belonging to the group of one of the largest financial institutions in Europe, we prepared a comprehensive document, including a benefit test for the acquired support services. The purpose of preparing the documentation was to gather evidence and demonstrate that the acquired services are actually implemented, as well as to present the benefits achieved by the company in connection with their implementation.
IT client
We successfully completed an audit at one of our clients, during which the authorities verified transactions carried out with related parties and expressed doubts about the way remuneration was determined in one of them. As part of the audit, we also supported the client in preparing a description of the benefits of the services provided and collecting evidence of the provision of particular services (including contacting the Group to obtain them). As a result, the reasonableness and market amount of the remuneration were questioned.
Global medical customer, alcohol products manufacturer, global manufacturer of paint solutions
We actively support clients in negotiations and in the process of obtaining a KAS decision on advance pricing agreement (APA). An element of the application, as well as the subject of discussions and clarifications, was the benefit test.
Contact our experts if you have any questions
Łukasz Kupień
Partner | Tax advisor E: lukasz.kupien@mddp.pl T: +48 792 999 105
Marta Klepacz
Partner E: marta.klepacz@mddp.pl T: +48 533 889 036