Benefit test: a global priority for tax authorities in transfer pricing

What is a benefit test?

The benefit test is an analysis that confirms the following:

• the purchased intangible services have indeed been performed,
• the recipient derives benefits from the purchase that contribute to their income,
• the purchase of services is business rational.

Who does it apply to?

The benefit test applies to all group entities that receive support services, including primarily management services, commonly referred to as the management fee.

Is it mandatory?

The benefit test is not mandatory; however, without it, justifying the purchased services or the amount of remuneration can be challenging.

The situation is different when dealing with transactions involving entities in tax havens. In such cases, the benefit test—understood as a description of expected economic benefits, including tax implications—is a mandatory component of transfer pricing documentation.

Is it only required in Poland?

Not only. Foreign case law demonstrates that the benefit test is recognized in many countries. Authorities focus on it in relation to aspects such as:

• evidence of service provision,
• duplication of costs, and
• the actual benefits of the services provided.

Service duplication and real benefits

Tax authorities verify whether services provided by related parties are not already being purchased under other contracts from third parties (duplication of costs). They also assess whether the transaction has resulted in benefits, such as an increase in profitability or income relative to the costs incurred (real benefits). Also, under OECD Guidelines a service is an economic or commercial interest for the entity receiving it, which benefits its commercial position.

Authorities may conclude that the taxpayer did not receive any tangible benefit from the management services, particularly if the taxpayer has already incurred expenses for professional and consulting services in a similar scope with an independent party. An example of such a conclusion can be found in the case of India vs. Gemplus India Pvt. Ltd., March 2009, ITA Case no. 352.

It is also worth mentioning the issue of shareholder costs (e.g. costs related to reporting, including the consolidation of reports). Tax authorities indicate that these costs should not be included in the cost base. Therefore, they determine the arm’s length remuneration without taking such costs into account.

Evidence of services received – concrete proof is what matters most

It is imperative to demonstrate that the evidence presented during an audit is directly related to the actual services provided. General evidence of supporting activities, such as airline tickets or conference expenses, is insufficient. You need to prove that a specific flight was connected to a meeting concerning specific economic or commercial plans, e.g. to launch a new assembly line. For instance, notes taken during this meeting with a service provider (another piece of evidence) and subsequent negotiations with suppliers of the relevant equipment would support this claim.

Tax authorities emphasize that overly general evidence often fails to identify the actual services provided, including management services. According to the authorities, documents like reports, emails, tickets, invoices, and sales statements do not necessarily prove that services were performed, particularly when the data reflects only general costs. A relevant example is the ruling in the case of Romania vs. A. Romania S.R.L. from April 2021 (Case No. 2644/2021). 

How to be on the safe side?

If you fail to provide detailed evidence and demonstrate the benefit to the recipient, the authorities may challenge the inclusion of these expenses in the tax base. This can lead to an overestimation of taxable income. For services of significant value, it is crucial to prepare in advance a summary outlining the scope, benefits, business rationality, and evidence of the services provided.

Having a benefit test will save you time and reduce the costs associated with a transfer pricing audit by tax administration. It also sends a clear signal to the tax authorities that you are implementing a transparent tax strategy.

Benefit testing is a vital component of tax risk management. We can assist you in preparing for it by assessing opportunities to automate the data collection process and demonstrate the benefits of the services you purchase. Trust our experienced transfer pricing experts to help you confidently prepare for the analysis of the reasonableness and rationality of your expenses.