Head office costs
The allocation of head office costs becomes important when your group has entities outside the home jurisdiction (country), because the allocation affects the profit in each jurisdiction where the group has subsidiaries or permanent establishments. It is therefore good to analyse these costs regularly to meet your transfer pricing obligations.
What the OECD Guidelines say
Chapter VII of the OECD Transfer Pricing Guidelines sets the test: a charge is justified only if the subsidiary receives a service an independent company would pay for, or would have performed itself (the benefit test).
- Shareholder activities, which the parent performs only as owner (its own board meetings, group consolidation, investor relations, listing costs), are not chargeable.
- Duplicate services that the subsidiary already performs itself are not chargeable either.
- Charges can be direct (per service) or indirect (through allocation keys such as headcount, turnover or usage). The key must reflect the benefit actually received.
- For low value-adding services such as bookkeeping, HR administration and IT support, the Guidelines offer a simplified approach: the pooled costs are charged with a 5% markup and lighter documentation. Not every country accepts this.
Costa Rica
A Costa Rican subsidiary can deduct a head office charge only if it can show that the cost was needed to earn taxable income in Costa Rica (Ley del Impuesto sobre la Renta, art. 8), and that the price is at arm's length. An intercompany agreement and an invoice alone are not enough. In an audit, the tax administration expects evidence of what was done, by whom, what local need it met, and how the allocation key and markup were chosen (see CUP, cost plus and TNMM).
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