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A common misconception amongst tax and TP professionals

Intercompany Agreements

17 August 2020

One misconception that we hear time and time again from well-meaning TP advisers is the recommendation of putting variables such as mark-up percentages in an appendix to an intercompany agreement, ‘so that they can be updated easily.’

The idea is apparently that the relevant page can just be ‘swapped out’ on an annual basis.

It doesn’t take more than a minute’s thought to realise that this doesn’t work. Just try ‘swapping out’ your latest credit card statement, to expunge the lockdown-induced Amazon purchases you wish you hadn’t made. Clearly, you wouldn’t get very far with that strategy – at best, you would be considered crazy. At worst, criminal.

The OECD TP Guidelines contain numerous references to the role of ‘contractual assumption of risk’. Clearly, there can be no contractual assumption of risk without a contract. And variation of a contractual term such as price requires the consent of the parties – unless the contract provides for some other mechanism.

As with any other task, the effective legal implementation of TP policies requires a combination of (a) applying basic principles correctly, and (b) an understanding of the specific context and ultimate objectives involved.

If you are a TP adviser, and you would like your team to have a better understanding of what legal steps your clients need to take in order for your TP advice to be effective, we would be very happy to help. Just email us at info@lcnlegal.com and request a free, confidential training webinar, during which we can go through the legal basics and answer any questions you may have.

Similarly, if you are responsible for the TP compliance of a particular group, and you would like to avoid unnecessary tax risks caused by defective legal implementation of your TP policies, we would be very happy to arrange a free, confidential and no-obligation consultation for you. During that consultation, we can discuss which intercompany transaction types present the highest risks, and help you identify whether corrective action may be needed.

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance