Shareholder Costs/Activities
A business will be obliged to carry out particular activities and incur some expenses because of its responsibilities to its shareholders, or because of the parent company’s role as a shareholder in the subsidiaries. This type of expenditure should not be recharged. A third party would not require such services and so would not be prepared to pay for them. Examples quoted by the OECD Guidelines (at paragraph 7.10) include the cost of the juridical structure of the parent company (such as meetings of shareholders of the parent, issuing of shares in the parent and costs of the supervisory board); costs relating to the reporting requirements of the parent (such as producing consolidated accounts or other reports for shareholders); and raising funds to invest in its subsidiaries.
Any system put in place to facilitate the reporting requirements for shareholders will fall within the definition of shareholder costs. There can be difficult borderline cases within what the OECD Guidelines refer to as the ‘costs of managerial and control (monitoring) activities related to the management and protection of the investment as such in participations’ (participations being, in this context, subsidiaries). Such systems might perform more than just the shareholder reporting function, although these other benefits may be just incidental.
The test in all circumstances is whether the activity is one that an independent party, under comparable circumstances, would have paid for. This will always depend on the facts and circumstances of a case.
The OECD don’t make their guidelines so accessible, 7.10 is the most practical section.
7.10 A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not be considered to be an intra-group service, and thus would not justify a charge to the recipient companies. It may be referred to as a “shareholder activity”, distinguishable from the broader term “stewardship activity” used in the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members, for example services that would be provided by a coordinating centre. These latter types of non-shareholder activities could include detailed planning services for particular operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management.
7.11 The following are examples of shareholder activities, under the standard set forth in
paragraph 7.7:
- a) Costs relating to the juridical structure of the parent company itself, such as meetings of
shareholders of the parent, issuing of shares in the parent company, stock exchange listing of the parent company and costs of the supervisory board;
- b) Costs relating to reporting requirements (including financial reporting and audit) of the parent
company including the consolidation of reports, costs relating to the parent company’s audit of the subsidiary’s accounts carried out exclusively in the interest of the parent company, and costs relating to the preparation of consolidated financial statements of the MNE (however, in practice costs incurred locally by the subsidiaries may not need to be passed on to the parent or holding company where it is disproportionately onerous to identify and isolate those costs);
- c) Costs of raising funds for the acquisition of its participations and costs relating to the parent
company’s investor relations such as communication strategy with shareholders of the parent company, financial analysts, funds and other stakeholders in the parent company;
- d) Costs relating to compliance of the parent company with the relevant tax laws;
- e) Costs which are ancillary to the corporate governance of the MNE as a whole.
In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member. The 1984 Report also mentioned “costs of managerial and control (monitoring) activities related to the management and protection of the investment as such in participations”. Whether these activities fall within the definition of shareholder activities as defined in these Guidelines would be determined according to whether under comparable facts and circumstances the activity is one that an independent enterprise would have been willing to pay for or to perform for itself. Where activities such as those described above are performed by a group company other than solely because of an ownership interest in other group members, then that group company is not performing shareholder activities but should be regarded as providing a service to the parent or holding company to which the guidance in this chapter applies.
