Transfer pricing documentation for tax purposes of IT services for an internal IT service provider
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This document provides an overview of the IT products and services transactions within the «Company» Group. It describes the scope of covered transactions, involved parties, and pricing methodology. The IT department is organized into three units - ITD, ITC, and ITK - which provide infrastructure, corporate applications, and workstation services respectively. A cost-plus method is used to determine arm's length prices, where the cost base includes employee and infrastructure costs, and a 3% markup is applied for services to other group companies.
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Transfer pricing documentation for tax purposes of IT services for an internal IT service provider
- 1. «Company» Transfer Pricing Transaction Module 3.X IT Products & Services 2008
- 2. IT Products & Services TP Module 2008 Table of Contents 1 2 Introduction and Executive Summary ............................................................... 3 Scope and Abbreviations.................................................................................. 3 2.1 2.2 3 Transactional Analysis ..................................................................................... 4 3.1 3.2 3.3 3.4 3.4.1 3.4.2 3.4.3 3.4.4 3.5 3.5.1 3.5.2 3.5.3 3.5.4 3.5.5 4 Purpose and Scope ............................................................................................................ 3 Abbreviations ...................................................................................................................... 3 Introduction to the Transactions ......................................................................................... 4 «Company»’s IT organization ............................................................................................. 4 The ICT Steering Committee .............................................................................................. 5 Functional Analysis............................................................................................................. 5 Introduction ................................................................................................................................................... 5 Functions ...................................................................................................................................................... 5 Risks............................................................................................................................................................. 7 Assets........................................................................................................................................................... 7 Transfer Pricing Principles and Methodology ..................................................................... 7 Choice of transfer pricing method for the fixed price services provided by the IT Department ....................... 7 Applying the Cost-plus method – cost base .................................................................................................. 7 Applying the Cost-plus method – mark up ..................................................................................................... 8 Allocation of the cost base to the various services rendered by the three units ............................................. 8 Conclusion .................................................................................................................................................. 10 Appendix ........................................................................................................ 11 4.1 Appendix I - Typical cost base of services provided ........................................................ 11 TP Documentation 2008 2
- 3. IT Products & Services TP Module 2008 1 Introduction and Executive Summary The purpose of this module is to give an overview of intra-group IT products and services transactions within the «Company» Group. The module will describe the covered transactions and describe the involved parties` respective contributions to the transactions. Furthermore the module will provide a description on how the intra-group prices are determined and a comparability analysis defending the prices charged for the transactions. 2 2.1 Scope and Abbreviations Purpose and Scope The present module pertains to the following categories of intra-group IT products & services transactions within the «Company» Group of companies: ERP (Enterprise Resource Planning system (SAP)) Portal services PC workstations Telephony Infrastructure services Application management services This module analyses and documents the service providers’ functions in relation to the IT products & services supplied and the cost plus methodology applied in determining the arm’s length fee payable by the service recipients. The module pertains to the fiscal year 2008. 2.2 Abbreviations The following abbreviations and acronyms are applied in this module: Abbreviation IT ITK ITC ITD SLA ICT SAP ERP CIO BU TC PG MARCO Servicedesk Explanation The entire IT & Process Innovation Department of «Company» The Customer Service Center, a unit within IT & Process Corporate IT services, a unit within IT & Process IT Infrastructure and Workplace Services, a unit within IT & Process Service Level Agreement, an agreement between two parties to supply and receive services at a pre-determined quality and cost Information and Communications technology Provider of ERP software, as well as the name of the ERP system in use by «Company» Enterprise Resource Planning. ERP systems can have functionality for accounting, procurement and logistics, etc Chief Information Officer, the head of the IT & Process Department Business Unit within «Company» Trading and continental operations, a business unit Power generation, a business unit The system in which «Company» tracks and monitors risk A function with IT, also known as Helpdesk. However, it is also an IT system in TP Documentation 2008 3
- 4. IT Products & Services TP Module 2008 Abbreviation 3 3.1 Explanation which this particular function manages its work. Transactional Analysis Introduction to the Transactions «Company» has established a centralized IT and Process Innovation department (IT) in «Company» AS in order to provide standardized IT services to the «Company» Group. The main objective is to ensure that the «Company»group has well functioning and competitive IT solutions and services to support the core business processes in the Group. The contractual basis for providing IT services is a Service Level Agreement which is entered into between «Company» AS and the various Group companies. 3.2 «Company»’s IT organization The IT and Process Innovation department is organized as follows: TP Documentation 2008 4
- 5. IT Products & Services TP Module 2008 The organizational units within the IT and Process and Innovation department which provide these services covered in this module are: ITD – IT infrastructure and workplace services ITC – Corporate IT services ITK – Customer service center The description of the IT organization will therefore be limited to these three units, the units inside the red frame above. These three units are staffed with about 40 specialized IT personnel, both full time employees and consultants. There is no duplication of functions performed between IT and departments / personnel in other Group companies. Please note that the service rendered from the other units shown above, are priced based on hourly rates or distributed aspart of the Intra Group Services. Please refer to the relevant transaction modules for the pricing methods. For an overall description of the IT department, please refer to the legal entity description of «Company» AS. 3.3 The ICT Steering Committee The ICT steering committee is chaired by the head of the IT department and consists of representatives from the Groups main operating units and members of the IT management team. The committee, which has no formal power, is used by the IT management team for the purpose of strengthening, communicating and obtaining feedback on strategic directions as well as for certain operational issues experienced by the customers. As such, with regards to products and services and their pricing, the committee is presented with an overview of said items. Feedback from the committee is typically reflected before implementation. 3.4 3.4.1 Functional Analysis Introduction The purpose of the Functional Analysis is to identify the characteristics of the functions performed, risks carried and assets applied related to the transactions. 3.4.2 Functions 3.4.2.1 Description of functions performed by ITD ITD provides the operational, maintenance and support functions for the following ITinfrastructure and telephony services: Operation and availability of processing power (servers) Storage, including operation of databases and backup/restore functionality Telecommunications, network and telephony services Monitoring of all IT infrastructure services to prevent downtime of data and information exchange Platform for integration of data between different corporate systems TP Documentation 2008 5
- 6. IT Products & Services TP Module 2008 3.4.2.2 Description of functions performed by ITC The ITC unit performs the operational, maintenance and support functions for the following services: ERP services(i.e. SAP) Provides access to the different modules of the Enterprise Resource Planning system SAP used by the «Company» group (Finance, HR, Procurement/Logistics). Access gives the user the ability to perform transactions and extract reports based on user privileges. Portal services (The portal, i.e. the intranet solution) Gives the user access to various services on the intranet solution used by the «Company» Group such as: News and information, Archiving solutions, Recording worked hours etc., Various reports (finance, HR, etc), Travel expense reports, Procurement, Dictionaries, Access to software, Your employment contract and salary information, HR information, «Company»’s governance system. Application management services Operation, maintenance, and further enhancements/development of the following business solutions: Tridon Maintenance Job Tech Interface Job Tech/SAP Cash Management module 3.4.2.3 Description of functions performed by ITK The ITK unit performs the following functions: PC workstations The users can choose between the following categories of workstations: Stationary Portable Thin client Mobile The service includes access to e-mail and standard office software such as Microsoft Office. Included are safety measures such as anti-virus and firewall to mention a few. The PC is owned by «Company» AS. In addition, the following services are included in the price of a workstation: Service Desk The service desk typically handles the following requests from users: Error situations experienced using IT systems and hardware Ordering new services Requests for changes to IT systems and user access The service desk either handles the requests themselves or passes it on to experts with specialized knowledge, in order to handle error situations, with IT systems or hardware. TP Documentation 2008 6
- 7. IT Products & Services TP Module 2008 User management This is part of the service desk responsibilities. User management starts when a new employee starts his or her work. The service desk establishes the user in the IT systems with the privileges determined at the time. It also deals with changes to user access and privileges, as well as deletion of users at the time of employment termination. 3.4.3 Risks The IT department has a significant responsibility in order to manage and mitigate risks incurred by providing IT services. However, the Service Level Agreements with the customers (the other companies within the Group) eliminate/reduce the finance risk related to the supply of the services mentioned above. The Service Level Agreements do not penalize the IT organization financially if a potential threat should be inflicted upon one or more of our customers due to failing IT services. Hence, the operational risk is not priced into our services. Risks are managed through a separate process with the help of an IT system called MARCO. There are also financial risks on the cost side of providing services to our customers, however, these risks are always there, and in fact given the fact that our prices are cost-based, we do have an option to adjust prices (up, or down) to reflect a changed cost base over the year. However, this will always be presented to the ICT Steering Committee in advance. 3.4.4 Assets To provide the services mentioned under ITC, ITK and ITD, the following assets are used: Personnel Office facilities and related infrastructure Hardware (servers, network equipment) Office equipment Software and licenses Know-how (IT understands «Company» business processes) All assets are owned and operated by «Company» AS the company IT & Process is part of. 3.5 3.5.1 Transfer Pricing Principles and Methodology Choice of transfer pricing method for the fixed price services provided by the IT Department To determine the arm’s length price of the services mentioned under chapter 3.4.2 above, the IT Department has applied the Cost-plus method. Please refer to the Masterfile for a description and the reasons for selecting this method. 3.5.2 Applying the Cost-plus method – cost base The cost-base used for the pricing of the services consists of the unit’s total wages and salaries, in addition to standard personnel related costs such as training, mobile phone usage etc. Additionally, product service related costs such as license/hardware maintenance fees and communication costs are included as well asdepreciation expenses related to IT projectsand hardware purchases. TP Documentation 2008 7
- 8. IT Products & Services TP Module 2008 These costs are tracked against the various services performed and represent the cost base for each service. 3.5.3 Applying the Cost-plus method – mark up Due to the limited riskon the provider side, see chapter3.4.3 above, and the fact that the major part of the cost base consists of external costs, a markup of 3% is applied on the cost base in order to determine the arm’s length price of the various services rendered by the IT department to other group companies. 3.5.4 Allocation of the costbaseto the various services rendered by the three units Please see the flowchart that follows in chapter 3.5.4.4 below. 3.5.4.1 Provided by ITD The cost base of ITD is distributed based on the number of servers used in support of thefollowing services described in this document: Telephony services ERP services Portal services Services for various applications PC workstation services The cost base pr user of telephony services is then established by dividing the cost baseof Telephony services by the number of telephony users. 3.5.4.2 Provided by ITC The cost base of ITCincluding the infrastructure cost transferred from ITD is distributed based on the personnel resources used to run each service. For ERP and Portal services, the cost base pr user is calculated based on the total cost divided by the registered users of each service. For the application services, the cost base for each application service is the total cost allocated to the application. 3.5.4.3 Provided by ITK The cost base of ITKand the infrastructure cost transferred from ITD is distributed to the various PC workstation categories. The cost base of each PC Workstation category is determined based on the depreciation cost of each category of PCs and onthe number of personnel resources needed to run and maintain the service. The cost base pr user of each PC workstation category is then determined by dividing the cost base by the registered users of each PC workstation category. Within«Company» AS the cost of the various services are transferred to the users with no mark-up. A mark-up of 3% is added to the invoicing of the services to users in other Group companies. TP Documentation 2008 8
- 9. IT Products & Services TP Module 2008 The cost/prices are presented to the ICT Steering Committee in the beginning of the year, and cost transfers/invoicing takes place on a monthly basis. The invoicing is based on signed agreements with the relevant Group companies in «Company». 3.5.4.4 Flowchart showing interactions between IT units in delivering services to customers TP Documentation 2008 9
- 10. IT Products & Services TP Module 2008 3.5.5 Conclusion In the opinion of «Company» AS, the above cost-base and mark-up used demonstrates that the fixed prices of the IT services rendered within the «Company» Group are in compliance with the arm’s length principle. TP Documentation 2008 10
- 11. IT Products & Services TP Module 2007 - Appendix 4 4.1 Appendix Appendix I - Typical cost base of services provided Most services use a larger or smaller part of the typical operational expense cost items of the budgets of the service provider units ITC, ITK and ITD. Cost item Wages and salaries (including corresponding social costs) Depreciation expense Freight costs Electricity Housing rent and other related expense (security, snow clearing, etc) Software licenses and maintenance costs Repair and maintenance of hardware IT consulting services Office supplies IT hardware components Mobile phones Magazines and newspapers Training for employees Telephone (including mobile phones) and fax Communication costs (ADSL, LAN, WAN, etc) Travel expense including lodging and food Meetings and seminars including entertainment expense Advertizing Expensed project costs Office services IT services Purchase of personnel from other parts of the «Company» Group TP Documentation 2008 11