Unsubstantiated Management Fees and Shared-Service Charges

Multinational groups often centralize functions such as accounting, human resources, information technology, legal support, finance, or management services.

Problems can arise when a U.S. company is charged for services that do not provide a sufficient benefit or when the allocation of costs is not properly supported.

Under the U.S. services regulations, an activity generally provides a benefit when it creates a reasonably identifiable economic or commercial benefit for the recipient, taking into account the relevant facts and circumstances. The regulations also contain rules for activities that are duplicative, too remote or indirect, or performed primarily for shareholder purposes.

Common mistakes include:

• Using vague descriptions of services.
• Charging the subsidiary for shareholder or stewardship activities that do not provide a compensable benefit.
• Charging for services that duplicate activities already performed by the recipient.
• Failing to demonstrate the benefit received by the U.S. company.
• Using an allocation key that does not reasonably reflect the benefits received.
• Failing to maintain records supporting the services provided and the costs allocated.

Companies should maintain clear service agreements, supporting records, appropriate allocation methodologies, and documentation that explains how the services benefit the recipient.