Risk Management for Intercompany Service (ICS) Costs: Standards and Documentation to Substantiate Benefits

Within the operating structure of multinational corporations, payments for Intercompany Services (ICS)—such as administrative, IT, legal, financial, or management support—are essential transactions but also among the most scrutinized for tax risk. Tax authorities often examine ICS expenses closely, as they are considered one of the easiest channels for profit shifting.

To defend ICS expenses, enterprises must strictly comply with the Arm’s Length Principle, which is evaluated through two key questions: “Did the service actually exist?” and “Is the fee reasonable?”.

I. Benefit Test – The Legal Foundation of ICS

According to OECD guidelines and Vietnam’s Decree 132/2020/NĐ-CP, an ICS cost is deductible only if it passes the Benefit Test, which requires:

1. Actual Service and Economic Value

Internal services must provide commercial or economic value to the recipient, helping improve or maintain its business position. “Actual” means the service is one that an independent enterprise would be willing to pay for or perform itself.

2. Exclusion of Shareholder Activities and Duplicative Activities

• Shareholder Activities: These are services that benefit only the parent company in its capacity as owner (e.g., group consolidation reports, investment portfolio management, IPO preparation). Such costs must not be charged to subsidiaries.

• Duplicative Activities: Costs are non-deductible if the subsidiary already performs the same function internally or outsources it independently. The group must demonstrate that the service is supplementary and not overlapping.

II. Documentation to Substantiate Benefits and Pricing

Evidence is the most critical factor in ICS risk management. Documentation must prove not only that the services were provided but also that they were necessary and reasonably priced.

1. Intercompany Service Agreement

A valid agreement must be executed before service provision and include:

• Type and Scope of Services – detailed description of work performed
• Pricing Mechanism – e.g., cost-plus 5%
• Cost Allocation Methodology (Allocation Key) – basis for distributing parent-company service costs

2. Evidence of Actual Benefit

This is the decisive criterion for tax acceptance.

• Qualitative Evidence: Proof of participation or usage by the subsidiary:

  • Meeting minutes

  • Email exchanges

  • Project reports (e.g., market feasibility study)

  • Service acceptance or handover records

• Quantitative Evidence: Proof of actual results or business impact:

  • IT upgrade reduces operating costs by 10%

  • Marketing service increases quarterly revenue by 5%

3. Reasonable Allocation Key

Allocation keys must reflect the nature of the service and be consistently applied across the group.

Examples:

• IT Services: number of users, devices, server time

• Finance/Accounting: revenue, total cost, total assets

• Management/HR: headcount or payroll

III. Managing Pricing and Mark-up Risks

ICS fees must comply with market pricing principles.

• For Low Value-Added Services, OECD recommends a 5% mark-up under the Cost-Plus method.

• Companies must substantiate cost pools, ensuring the exclusion of shareholder or unrelated costs.

Managing ICS costs is a major challenge. Companies must focus not only on calculating the cost but also on substantiating the value created.

The absence of a detailed service agreement, clear benefit evidence, or transparent cost allocation exposes the enterprise to tax adjustments, CIT reassessment, and penalties.

Viet Australia
Viet Australia Auditing Company is an independent auditing organization licensed and established in 2007 in the Socialist Republic of Vietnam.