Article
Optimizing intercompany services: The services cost method and BEAT planning
Jun 03, 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.
Exclusions from SCM
Certain activities are specifically excluded from the SCM where they relate to the core activities of the business or contribute to its value creation. These are considered higher risk activities that need separate benchmarking to determine an appropriate arm’s length return. These activities include the following:
- Manufacturing
- Production
- Extraction, exploration or processing of natural resources
- Construction
- Reselling, distribution and similar services
- Research and development
- Engineering or scientific activities
- Financial transactions
- Insurance or reinsurance
SCM and BEAT Exception
The BEAT was introduced in 2017 to discourage U.S. and foreign corporations from avoiding tax liability by shifting profits out of the U.S. BEAT is a minimum tax rate of 10% that applies to multinational enterprises (MNEs) that had at least $500 million in average annual gross receipts for the previous three years and make base erosion payments to foreign related parties. Base erosion payments are any amounts paid or accrued by a U.S. taxpayer to a foreign related party which are allowed as a deduction, including (but not limited to) service fees, interest, royalties and rents. The tax rate is set to increase to 12.5% in 2026.
Payments for services to foreign related parties can count as base erosion payments under BEAT unless they qualify for the SCM exception. However, if a service payment qualifies under the SCM, and no markup is included, generally speaking it is not treated as a base erosion payment, and it does not increase BEAT liability. However, some services are not eligible for the SCM exemption, for instance those that are connected with IP or brand value. Further, if the taxpayer decides to charge a markup for SCM-eligible services, the markup component will be subject to BEAT.
To demonstrate how the SCM exception works, consider a U.S. parent company which receives routine IT support services from its foreign subsidiary, for which it pays $1 million. In the ordinary course, this payment would qualify as a specified covered service and meet the SCM criteria. To the extent the foreign regulations require a markup, only the cost component of the payment would be excluded from BEAT, and the markup component would still be subject to BEAT.
Takeaways
The SCM provides taxpayers with an excellent opportunity to remove certain outbound services related payments from their BEAT calculations. Determining eligibility requires a detailed review of the nature and characterization of the specific services. The service needs to be routine or supportive in nature, cannot be an excluded activity and cannot contribute to the key competitive advantages, core capabilities or fundamental risks of success or failure of the MNE.
Baker Tilly can help MNEs determine whether they qualify for this exception and assist in applying it. Contact your Baker Tilly advisor today for more information.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
