How is a cost plus mark-up worked out?
You establish the costs the provider incurs in performing the work, then add a mark-up that comparable independent providers earn on a similar cost base for similar activity under similar risk. Two parts of that carry most of the difficulty. The first is which costs belong in the base, because a mark-up on direct salaries and a mark-up on fully absorbed cost are not the same figure and cannot be compared with each other. The second is establishing that the provider really does work under limited risk, since the method assumes it takes neither the entrepreneurial upside nor the downside.
Which costs go into the base for the mark-up?
Whatever basis the comparable providers use, applied the same way. In practice that usually means the direct costs of performing the work plus a reasonable share of the overheads that support it, consistently allocated. The point is not that one definition is correct but that the base being marked up and the base behind the comparable mark-up must match. A base that excludes supervision, premises and support functions will justify a higher percentage; one that includes them justifies a lower one. Stating the base explicitly in the documentation prevents an argument later about which figure the percentage attaches to.
Should costs we just pass on be marked up?
Generally not, where the provider merely arranges the purchase and adds nothing to it. If a group company buys a third-party licence or books travel on behalf of another entity, it has performed a small administrative act, not the activity the licence or the travel represents. Marking up the whole amount rewards it for value it did not create. The practical step is to separate pass-through amounts from value-adding costs in the charging mechanism, recharge the former at cost, and apply the mark-up to the work actually performed. Keep the split visible in the intercompany invoice and in the underlying records.
Can we charge on budgeted costs and adjust later?
Yes, and for a service centre it is usually the sensible way to run the year. Charging monthly on budget keeps the recipient's accounts steady and matches how independent providers often quote. What makes it work is the reconciliation: at year end the actual costs are established and the charge is trued up, so the provider ends the year on the intended mark-up rather than on whatever the budget variance produced. Without that step the method drifts, and an examination will ask why the provider retained a windfall or absorbed a shortfall it was not meant to bear.
Does cost plus suit a manufacturer that owns its designs?
Probably not. The method assumes a provider working to another party's instructions under limited risk, which is why a mark-up on cost is an adequate reward. A manufacturer that develops its own product, decides what to make, carries the inventory and takes the consequences of demand falling is not in that position, and the return it should earn is not a fixed percentage on cost. Where the facts sit between the two, the analysis has to say which risks the entity controls in practice, because that is what decides whether a cost-based method describes it at all.
Is cost plus right for an intra-group service centre?
It is the usual fit, because a shared service centre performs defined support activity at the group's direction and does not take market risk. The work is then mostly definitional: which costs belong in the base, which recipients benefit from each activity, how the cost is allocated between them, and whether any of the services are of a kind that a recipient would not have paid for at all. A centre that has also begun making commercial decisions for the group has moved beyond the assumption the method rests on, and the choice needs revisiting.
What happens if the two countries disagree about which of them can tax me?
The treaty has a procedure for exactly that. You apply to the competent authority in your residence country, which takes the case up with its counterpart, and the two negotiate a position that removes the double taxation. Some treaties add binding arbitration if they cannot agree. It is slow and it runs on documents, so the practical work is preserving the record and filing protective claims while the clock runs. See our treaty work.
How do families with assets in two countries handle inheritance?
With paperwork built for both systems rather than one. In practice that means wills that work where each asset actually sits, an executor with authority a foreign bank or land registry will accept, clearance certificates before the estate distributes so the executor is not left personally exposed, and an estate tax exposure calculation done while the person is alive and can still act on it. Doing it afterwards costs more and forecloses most of the options. See cross-border wills and trusts.
