Article
Optimizing intercompany services: The services cost method and BEAT planning
June 3, 2025 · Authored by Ryan Smith
The services cost method (SCM) is a tool created by the IRS to make it easier for companies to handle routine services between related businesses, like IT support or payroll, without needing to add a profit markup. If certain rules are met, using SCM can also help companies lower their tax bill under the Base Erosion and Anti-Abuse Tax (BEAT). This article explains how SCM works, which services qualify and how it can benefit companies with international operations.
Services cost method
The IRS introduced the SCM in 2007 to reduce the compliance burden relating to routine intercompany services. It is listed as an acceptable transfer pricing method under the U.S. Treasury Regulations and the taxpayer can elect to use it where a taxpayer provides qualifying services to a related party without charging a markup.
Eligibility
To use the services cost method, services must be either “specified covered services,” or “low margin covered services” as determined by the IRS.
Some examples of “specified covered services” include the following as set out in Rev. Proc. 2007-13:
- Payroll
- Accounts receivable
- General administrative functions (e.g. drafting correspondence, scheduling appointments, organizing and maintaining electronic files)
- Meeting coordination and travel planning
- Accounting and auditing
- Staffing and recruiting
- Information technology
Alternatively, services may qualify for the SCM if they are “low margin covered services,” meaning those for which the median comparable markup is less than or equal to 7%. Note that a separate benchmarking analysis is required to determine eligibility as a low margin covered service under SCM.
In addition to meeting one of these two requirements, to be able to apply the SCM, the service must not contribute significantly to the key competitive advantages, core capabilities, or fundamental risks of success or failure in the business of the controlled group. For instance, the functions undertaken by a Chief Executive Officer in making important decisions and providing strategic direction to the organization would not be eligible for the SCM.
