Intangible services – how to minimize the risk of challenging costs?

Intangible services have long been a focus of tax authorities. It is therefore essential to understand the key risk areas associated with these service costs and to manage them proactively throughout the year—not just when preparing transfer pricing documentation.

Confirmation of service performance (Benefit Test)

When it comes to intangible services, taxpayers must be able to demonstrate that the service was actually provided. This aspect is closely examined during tax audits.

A contract or invoice alone is not sufficient proof that the service was provided. To confirm its execution, additional documentation is required. This may include e.g. email correspondence, a memorandum, or a transcript of an online meeting. Such evidence helps mitigate the risk of the transaction being deemed fictitious. Without proper documentation, proving that the service took place can be challenging.

It is advisable to collect documentation on an ongoing basis to avoid difficulties in reconstructing it during audits of previous years. Implementing internal procedures for gathering performance-related documentation or using automated solutions, such as automatic email archiving, can help streamline this process.

Business justification for intangible services

Tax authorities also evaluate whether the purchase of intangible services is economically justified. For instance, if a company acquires marketing services from its group despite having its own marketing department, it must demonstrate that the transaction makes economic sense.

This situation does not automatically mean that the transaction is not of arm’s length nature. For example, such purchase may involve a global marketing strategy developed at the group level and tailored to the local market.

The taxpayer should maintain appropriate documentation to demonstrate that the service was necessary and delivered tangible benefits.

Intangible service pricing calculation

Verification of the arm’s length nature of intangible services extends beyond analyzing the applied profit margin. Authorities primarily examine other factors, such as the cost base and allocation keys. This is a key risk area, making it essential to ensure that:

• the cost base includes only costs related to the specific service,
• the allocation keys used are economically justified and appropriate to the nature of the transaction.

When purchasing services within the group, it is important to ensure access to a full price calculation.

Shareholder costs and intangible services

In intra-group transactions, not every type of assistance can be treated as a chargeable service. This applies to so-called shareholder costs, which include expenses related to shareholder control, such as:

• organization of shareholder meetings,
• issuance of shares,
• preparation of consolidated accounts.

Such costs should not be classified as intra-group services. If the parent company provides services, shareholder costs must be excluded from the calculation.

Reclassification of transactions – tax risk

Intangible services are also at risk of potential reclassification. If the tax authority determines that the actual nature of a transaction differs from what was originally reported, it will reclassify the transaction accordingly.

For example, this could involve the reclassification of a licensing transaction as a trademark administration service, as we discussed in one of our previous articles. (https://www.mddp.pl/uslugi-niematerialne-na-celowniku-organow-skarbowych-jak-bronic-sie-przed-recharakteryzacja-transakcji/)

How to protect against the risk of challenging intangible service costs?

The above issues primarily concern the risk of a challenge to the inclusion of intangible service costs as deductible costs. If the tax authorities determine the transaction to be fictitious, they will disallow the entire cost. If the arm’s length nature of the transaction is questioned, the authorities may disallow part of the costs claimed by the taxpayer as deductible costs.

To minimize tax risk, it is important to:

• obtain documentation confirming the actual performance of the service – this can be combined with a financial audit to verify which services require such documentation,
• have a business justification for each transaction – and if not available, consult with the group on the appropriate treatment,
• ensure a reliable transfer pricing calculation – it is advisable to request this during the financial audit stage when the group is more responsive.

Intangible services are a key area of audit. It is beneficial to use the audit period and maintain ongoing contact with the group to identify potential transfer pricing risks, manage them effectively, and protect against possible consequences.