Spending time and money on TP policies and TP documentation, but not finishing the job and implementing them with appropriate intercompany agreements, is a bit like buying a Tesla Cybertruck and then fitting tyres which are old and bald.
You’re leaving it to chance as to whether you’ll get the outcome you want in a tax audit.
Here are 11 warning signs that your transfer pricing policies may not be supported by intercompany agreements which are fit for purpose:
1. You haven’t seriously looked at your agreements for 5 years or more.
2. You’ve changed key terms, but not updated your agreements and kept on record an explanation of the commercial rationale for the changes.
3. You have no agreements at all.
4. Your agreements are unsigned.
5. Your agreements are all signed by the same person. (This may be technically acceptable from a legal perspective. But it may indicate that the agreements were not taken very seriously.)
6. You have agreements which are 50+ pages long. (This probably means that no-one has ever read them, because they lost the will to live after reading the definitions clause. So the chances of the agreements being correct are probably close to zero.)
7. Your agreements have no pricing clauses. Or they say the prices are to be determined in accordance with the arm’s length principle / TP policies in force from time to time. (That’s not an agreement. That’s paying lip service to the idea of having an agreement.)
8. Your intercompany agreements were prepared by tax people, not lawyers. (Yes, I know that international tax and TP professionals have brains the size of a planet. But it’s a bit like asking your dentist to rewire your house. It’s a different skill set.)
9. You’re using template agreements which were given to you as a freebie.
10. Your TP local files don’t include a comprehensive list of all material intercompany agreements. (Maybe because you doubt that they are correct.)
11. You’re always backdating your agreements, rather than implementing them in advance.
Of course, if your TP documentation is patchy and half-hearted, then by all means, take the same approach for the legal implementation of your TP.
P.S. I have no knowledge of the state of Tesla’s intercompany agreements. I’m sure they are world class. And I’m sure that your tyres are lovely too. So please don’t sue me, Elon.
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