Low value-adding intra-group services (LVAS) are routine support functions – such as HR, IT, and accounting – that do not create unique intangibles or carry significant risk. Under Chapter VII of the OECD Transfer Pricing Guidelines (2022), qualifying services may be priced using a fixed 5% mark-up on eligible costs, with no benchmarking study required.
How to Apply the OECD Simplified Approach: Key Steps
- Identify qualifying services – Confirm each service meets all four LVAS criteria under Chapter VII of the OECD Transfer Pricing Guidelines (2022).
- Build the cost pool – Gather all direct and indirect costs by service category. Exclude pass-through costs and shareholder activity costs.
- Select allocation keys – Choose a reasonable, consistent key per service category. It should reflect actual use.
- Apply the 5% mark-up – Add the fixed 5% mark-up to all eligible pooled costs. Recharge pass-through costs at cost only.
- Prepare documentation – Retain a description of each service, the cost pool calculation, the allocation key used, and evidence of benefit received.
What Are Low Value-Adding Intra-Group Services?
Think of the functions that keep a business running but never appear in the pitch deck. Payroll gets processed. IT tickets get resolved. Health and safety data gets logged. These tasks are essential – but they are not what the business was built to do.
That is exactly the space LVAS occupies in transfer pricing. A service qualifies when it supports the group without driving its commercial engine. It must not create or exploit unique, valuable intangibles. It must not expose the performing entity to significant financial or operational risk.
The distinction matters because transfer pricing compliance is not one-size-fits-all. Routine support functions carry far less risk and complexity than core business transactions. Chapter VII of the OECD Transfer Pricing Guidelines (2022) recognizes this. It offers an elective simplified approach that cuts compliance costs and reduces audit exposure for qualifying services – without sacrificing defensibility.
Which Services Qualify – and Which Do Not?
The Four Criteria a Service Must Meet
The OECD does not leave qualification to guesswork. Chapter VII sets out four specific criteria. A service must meet all four to be treated as LVAS:
- It is supportive in nature – it assists the group rather than generating its profits.
- It is not part of the core business – it does not drive the MNE group’s economically significant activities.
- It does not use or create unique and valuable intangibles.
- It does not involve assuming or controlling substantial risk – and does not give rise to significant risk for the service provider.
Every criterion must be satisfied. Miss one, and the simplified approach is off the table.
Context Matters More Than Category
This is where many groups make mistakes. The OECD provides examples of services that can qualify – but the list is not a free pass. Whether a service qualifies depends on what the group actually does.
IT support is a good illustration. For a consumer goods company, basic IT helpdesk services are routine overhead. For a technology firm whose entire business model is built on IT, the same function sits at the core of its commercial engine. Same service, different answer.
The qualifying examples under the OECD Guidelines include:
- Finance and accounting – bookkeeping, invoice processing, and financial reporting.
- Human resources – recruitment support, training coordination, and payroll administration.
- Administrative support – office management and general clerical services.
- IT support – software installation, technical assistance, and infrastructure maintenance.
- Regulatory compliance monitoring – collecting and tracking health, safety, and environmental data.
These functions keep the business running. They do not win clients or build competitive advantage – at least, not for most groups.
One additional rule applies: where a service of this type is also sold to unrelated customers, the simplified approach is not available. In that case, reliable internal comparables already exist, and those should be used to price the intra-group transaction instead.
Services That Never Qualify
Some activities are always excluded – regardless of how routine they feel internally. The OECD draws a hard line:
- Research and development
- Manufacturing and production
- Purchasing of raw materials used in production
- Core sales, marketing, and distribution
- Financial transactions and treasury functions
- Insurance and reinsurance
- Natural resource extraction, exploration, or processing
- Senior management and corporate governance activities
One nuance worth noting: exclusion from the simplified approach does not automatically mean a service adds high value. A service can still add low value and simply require a standard arm’s length analysis under the general intra-group services guidance. The label matters less than getting the pricing right.
Does My Service Qualify as LVAS?
How Does the OECD Simplified Approach Work?
Here is where the LVAS framework earns its appeal. Groups that elect the simplified approach replace a time-consuming arm’s length analysis with a single, fixed outcome: a 5% mark-up on all eligible costs.
No benchmarking study. No comparable transactions. No drawn-out negotiation with a tax authority over what an independent party might have charged.
The elective nature is worth stressing. A group is not required to use this approach. If a group prefers to price eligible services under a standard transfer pricing method, it may do so. But for most multinational groups handling high volumes of routine support transactions, the simplified approach may be the smarter path.
One important carve-out: pass-through costs are excluded. Where a cost is simply reimbursed with no added value, it is recharged at cost only – no mark-up applies.
The benefit test gets a similar practical makeover. Under the standard approach, a group must demonstrate that each individual service genuinely benefited the recipient. Under the simplified method, that test operates at the service category level. Tax authorities are not expected to pick apart individual transactions within an approved category.
How Are Costs Pooled and Allocated?
Every year, the group pulls together all direct and indirect costs tied to qualifying services. These are sorted by category. From there, the process splits in two directions.
Where a service benefits only one entity, the costs go directly to that entity – with the 5% mark-up applied. Where a service benefits several entities, those costs enter a shared pool. An allocation key then distributes the charges among recipients.
The key should reflect how the service is actually used. A few reliable examples:
- Headcount – for HR services
- Number of IT users – for IT support
- Number of vehicles – for fleet management
One key per category is usually enough. What matters most is consistency. A key that shifts from year to year without explanation invites scrutiny. Changes should always be documented and justified.
What Documentation Is Required?
The simplified approach cuts the paperwork burden – but it does not eliminate it. Groups that adopt the method should hold the following on file:
- A clear description of each qualifying service and why it meets the LVAS definition
- The total costs included in each service category pool
- The allocation key selected, with the reasoning behind it
- The specific charges allocated to each group entity
- Evidence that the recipient actually benefited from the service
One last practical point: local rules vary. Some jurisdictions set materiality thresholds. Where LVAS charges exceed a certain proportion of total revenue, a more detailed analysis may be required – even if the services themselves would otherwise qualify. Groups operating across multiple jurisdictions should verify local requirements before relying on the simplified approach.
Conclusion
The OECD simplified approach for low value-adding services does something rare in transfer pricing: it offers a genuinely practical solution for a genuinely routine problem. The fixed 5% mark-up removes the benchmarking burden. The streamlined benefit test reduces audit exposure. And the documentation requirements, while real, are manageable.
The critical step is getting the classification right at the outset. A service that looks routine but falls into an excluded category – or that carries more risk than it appears to – needs full transfer pricing treatment. That gap between assumption and analysis is where most LVAS disputes begin.
If your group provides or receives routine support services across borders, a structured LVAS review can reduce risk and simplify compliance across your entire intercompany framework. Contact TPTAX to discuss your intra-group service arrangements and documentation needs.
Our transfer pricing specialists work with multinational groups on LVAS classification, cost pool design, allocation key selection, and audit-ready documentation – across all major jurisdictions.
Frequently Asked Questions
What are low value-adding services in transfer pricing?
Low value-adding services are routine support functions – such as HR, IT, and accounting – that do not create unique intangibles or carry significant risk. Chapter VII of the OECD Transfer Pricing Guidelines (2022) defines them and provides a simplified pricing approach.
What is the fixed mark-up for LVAS under the OECD simplified approach?
The OECD simplified approach applies a fixed 5% mark-up on eligible costs. No benchmarking study is required to support this rate.
Are pass-through costs subject to the 5% mark-up?
No. Pass-through costs must be recharged at cost only, with no mark-up applied.
Which services are excluded from LVAS treatment?
R&D, manufacturing, core sales and marketing, financial transactions, insurance, senior management activities, and natural resource extraction are all excluded.
Is the OECD simplified approach for LVAS mandatory?
No. The simplified approach is elective. Groups may apply it or price eligible services under a standard transfer pricing method instead.
What allocation keys are acceptable for LVAS cost pools?
Allocation keys should reflect actual use of the service. Headcount works for HR, number of users for IT support, and number of vehicles for fleet management. The key must be applied consistently year to year.
