Everything seems to be about the Soccer World Cup (“SWC”) in Brazil at the moment. I am not sure if it is only me but have you noticed the huge amount of advertising around the SWC? There is advertising in magazines, TV shows, the stadium and pretty much anywhere else a company can stick there logo on. This makes for a very interesting transfer pricing topic.
Have you ever asked yourself, which company within a group of companies should be paying for the advertising of a global sporting event such as the SWC? Would it be fair to just point at the parent company and say, you pay, or should each company within the group pay a stake of the costs. I guess on the face of it, each company paying a fair share of the advertising costs is probably the most logical answer. But what is a fair share?
In order for us to determine which party(ies) of the group should pay for advertising we may want to look at advertising as a service provided by one company of the group to one of its related affiliates. This should make the problem slightly easier. In other words the company (usually the one with the IP) that runs the advertising campaign is providing a service to its related parties. In essence we just need to find out whether a related party would pay for the service or not.
In order to figure that out we need to perform a benefit test. The diagram below shows a quick and easy way of determining whether a related party would be willing to pay for a service (such as advertising).
Let’s go through the above with the help of an example. EvoCars, a company that manufactures and distributes cars runs an advertising campaign at the current SWC in Brazil. This includes all different types of advertising, from banners at the stadium to little clips on TV. The whole advertising campaign is organised by the head office in Germany and costs million. In order to recoup some of the money spent on the campaign EvoCars would like to charge its subsidiaries part of the total costs for the advertising campaign. EvoCars’ tax manager has been asked to determine if some of the fees can be on charged.
Let’s use the diagram above to answer the question.
Step 1: Does the activity provide a benefit?
The answer here is most likely yes, as long as the adverts are shown within the country. But it could be no, where for example a model is advertised that cannot be bought in that country.
Step 2: Is the service provided a stewardship service?
For those who are uncertain about what a stewardship service is, in short any service that is performed for the benefit of the shareholder. For example consolidated financials are said to be stewardship services (also referred to as shareholder services). This is due to the fact that a standalone subsidiary would not need to consolidate its financials, or would not benefit from such an exercise.
Coming back to Step 2, the answer is likely to be no as the advertising campaign is not only for the shareholder. Having said that, it also depends on what is advertised and whether the subsidiary actually benefits as per step 1.
Step 3: Is the service a duplicate service?
In most cases the answer to this question is no. But depending on the facts could be yes, for example if a related party is already running a similar advertising campaign one could argue that this is a duplicate service and as such not beneficial.
Step 4: Is the benefit received an incidental benefit?
The OECD Guidelines mentions the following about incidental benefits:
”For example, no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from the group’s reputation deriving from global marketing and public relations campaigns.”
From the above we can see that in EvoCars case there is no incidental benefit.
Therefore from applying the above diagram to our EvoCar example we can see that the service provided is beneficial and as such should be charged out to the different related parties who benefit in the advertising campaign.
What is the charge? That is a great question and I will touch on that another time.