LVAS 101: Playing Ball with the OECD

As the buzz around March Madness comes to its conclusion, for many taxpayers and preparers alike, April Madness is right around the corner. Many eyes will turn away from their TV screens and look ahead to the coming tax compliance requirements for the year. One of the hot topics for many of our multinational clients has been the OECD’s simplified transfer pricing method for low value-adding intra-group services (LVAS). Many taxpayers have found this method more convenient as it simplifies the compliance process each year. However, it is important to be aware of the nuance behind this method, especially as the IRS continues to issue fines with increasing frequency and severity. While the simplified method for LVAS may be appreciated by those willing to ease their compliance burden, there are many rules to keep in mind while doing so.

LVAS are considered to be those that “contribute minimal economic value” to a multinational enterprise group as a whole. If a transaction meets this standard and the simplified method is elected for reporting, then OECD guidelines allow taxpayers to forego detailed benchmarking in exchange for a 5% markup.

Benchmarking for transfer pricing studies is the most significant hurdle for most taxpayers, so this is understandably very enticing to many. For many, this 5% markup on intra-group services is well worth the reduced compliance burden. However, it is crucial to fully understand the reporting method before using it.

Before implementing simplified LVA reporting, it is imperative to ensure that the transaction in question qualifies as “low value-added.” Although OECD guidelines specifically outline the qualifications to be considered an LVA transaction, local regulations will take precedence over these guidelines. Therefore, it’s crucial to be aware of these local regulations as specific requirements or additional thresholds may be imposed.

Please note that the article was mainly written concerning the requirements and guidelines of the OECD. However, it is important to mention that the IRS has more strict and detailed requirements in place, and they perform a more comprehensive analysis to ensure that the documentation prepared and the positions taken meet all necessary standards.

Navigating the complexities of transfer pricing and international tax compliance can be daunting. As the IRS increases scrutiny on multinational entities, it is essential to be up-to-date and informed on the nuance of transfer pricing and international tax compliance. Please contact our Global Business Services team with questions regarding international tax or transfer pricing compliance.