According to the OECD’s TP Guidelines, analysing the contractual allocation of risk in intracompany agreements (ICAs) is the second step for pricing risk, after you’ve identified which risks are relevant.
Comparables aren’t comparable, unless the risk allocation is at least similar.
This makes complete sense. In our day-to-day lives, we all instinctively factor in contractual allocation of risk. Otherwise retailers wouldn’t offer product guarantees, and the insurance market wouldn’t exist.
The converse of this is that a misunderstanding of contractual risk allocation is likely to lead to a high risk of mispricing, no matter how sophisticated the economic analysis.
To put it another way, a Transfer Pricing professional who doesn’t understand the basics of contractual risk allocation is a bit like a surgeon who doesn’t read the patient’s notes before operating.
To help avoid MNEs avoid this kind of hit-or-miss outcome, we’re holding a live workshop specifically for TP professionals, to talk through the legal implementation of transaction types involving local sales entities.
The workshop will be held this Wednesday 14th July at 9am Central Time / 10am Eastern Time / 3pm BST / 4pm CET.
We’ll use mini case studies to go through the following issues (time permitting):
If you’d like to join the conversation, you’ll be very welcome. You can register for the webinar here.The No. 1 Question for Assessing How Well an MNE is Legally Implementing its Transfer Pricing
One of the blessings of the ‘new normal’ for us, is that we’ve been able to sponsor and participate in a far wider range of TP conferences than would otherwise have been the case – over the last 12 months, this has included TP Minds Australia, Asia, West Coast, Canada and Americas, as well as ‘TP Minds International’ (aka London) earlier this month.
A perennial issue for discussion at TP conferences is of course how to survive TP audits with the minimum of pain. And one of our most important objectives at these conferences is to explain how direct and immediate the connection is between the commercial terms of intercompany agreements (ICAs), and the operation of the arm’s length principle for TP purposes – and therefore why ICAs are so fundamental for tax audit readiness.
We also get to speak to TP professionals representing a wide range of MNEs and advisers, and share experiences of different approaches to achieving tax audit ready ICAs which are aligned with their TP policies.
Here’s what I would regard as the key question to ask, in order to assess how well a multinational group is likely to be managing the legal implementation of its TP:
‘Do you have a central archive of ICAs?’
Of course, it’s quite possible for the ICAs in a central archive to be riddled with defects and inconsistencies. But the mere fact that a central archive exists at all, suggests that attention is being put there.
My guess is that not many of Coca-Cola’s advisers were asking this question in 2007-2009, the period covered by the US Tax Court’s decision in November 2020. And no doubt, the failure to ask this question contributed to the Court’s finding that Coca-Cola’s agreements were ‘outmoded’ and ‘incomplete’ – and fundamentally inconsistent with the group’s TP policies. (For more on this, see this article: Coca-Cola’s US $12 billion IP Mistake).
My prediction is that at the TP conferences of 2022, the discussion will have moved on. The need for a maintained central archive of ICAs will be regarded as obvious and foundational, in the same way that twice-daily tooth brushing is regarded as basic dental care.Workshops – bring together representatives of the key in-house functions involved (e.g. tax, finance, legal, compliance and risk).
I’ve lost count of the number of transfer pricing articles I’ve read over the last couple of months which tell their readers to “review your transfer pricing policies” and “update your intercompany agreements” in the light of recent economic circumstances. This is undoubtedly good advice.
The problem is that few TP or tax professionals know how to analyse or write legal agreements, and even fewer commercial lawyers have an understanding of transfer pricing. So it’s no surprise if the result is often a mess: agreements which make no sense in the context of the group’s legal structure, and which don’t match their TP compliance policies.
Increasingly, we are receiving reports that local tax inspectors are carrying out a line-by-line review of transfer pricing agreements, and using discrepancies between those agreements and the stated transfer pricing policies to challenge positions taken. In addition, tax administrations such as the Australian Taxation Office appear to be recommending that taxpayers consult them prior to the implementation of changes to intercompany agreements in response to the pandemic. (See the ATO’s recent guidance here, and its further statement on interaction between transfer pricing and jobkeeper payments here).
We’ve thought hard about how we can provide the best possible value for money for multinational businesses which need to take action on their TP policies now, and which (understandably) want to utilise their in-house legal capacity as much as possible.
Here’s what we’ve come up with:
A package of 4 quick-start workshops, to facilitate a practical, achievable plan of action for the legal implementation of the required changes to intercompany agreements.
Because intercompany structures need to work from a holistic, multi-disciplinary perspective, it is essential to have the right people in the (virtual) room, and to bring together representatives of the key in-house functions involved (e.g. tax, finance, legal, compliance and risk).
The workshops are facilitated as live video calls, which are designed to help the group’s in-house project team plan and carry out the required work as efficiently as possible, and avoid common pitfalls (such as agreements with missing or inappropriate functionality for allocating risk).
· Agree the specific actions which the group’s internal team needs to complete before the next workshop
· Agree the specific actions which the group’s internal team needs to complete before the next workshop
Price: GBP 4,680 plus VAT (if applicable) (includes up to one hour’s preparation time spent by the LCN facilitator before each workshop). A discount of 20% is available for all our newsletter subscribers.
If you think this approach may be helpful for you or any business you look after, please get in touch.
You can read more about the workshop services we offer here: https://lcnlegal.com/training-hub/quick-start-workshops-to-help-groups-revise-and-update-their-intercompany-agreements-for-transfer-pricing-compliance/Coca-Cola’s US$ 12 billion IP mistake
The following article first appeared in IP Briefs, the journal of the South African Institute of Intellectual Property Law.
One might think that an organisation with one of the most recognised and valuable brands in the world, founded in 1892, might be a well-oiled machine when it comes to managing its intellectual property rights.
And yet the failure of the Coca-Cola Company to document its own IP appropriately was a key factor in the decision the US Tax Court in November 2020, when it ruled in favour of the IRS. According to the company’s own estimates, this decision will leave it with an incremental tax liability of approximately US$ 12 billion, unless its appeal is successful.
What happened? And what are the lessons for other corporates and their IP advisers?
To answer these questions, we need to take a glimpse into the world of international tax and transfer pricing.
Transfer pricing (‘TP’) is the international set of tax rules which determine the level of intercompany charges (e.g. service fees, royalties, prices for goods) which may be properly paid between associated entities within a multinational group. These rules are important because they determine in large part the taxable profits of associated enterprises in different countries.
There are significant differences in the interpretation and application of transfer pricing principles in different countries, and each country has its own set of national rules which modify or override general transfer pricing principles in various respects. However, there are a number of factors which tend to be common.
The OECD has adopted the arm’s length principle as an international standard for determining transfer prices for tax purposes. In essence, the arm’s length principle allows tax authorities to review the transfer prices affecting a particular subsidiary, and then tax that subsidiary based on the profits it would have made had the prices been negotiated between independent third parties.
For example, imagine a multinational group which provides software as a service. Let’s say that the software is developed and maintained in South Africa, and the parent company holds all the relevant intellectual property rights, including trade marks. Local subsidiaries in other countries act as principals in licensing the relevant software to customers in the relevant local markets.
Looking at the relationship between the parent company and a local subsidiary, one type of intercompany charge is a licence fee paid by the subsidiary for the right to sublicence the software, and to use associated know-how and materials. In general, the higher the licence fee paid by the subsidiary, the lower its taxable profits will be and, correspondingly, the higher the parent company’s revenue and taxable profits will be. The subsidiary may be subject to a transfer pricing challenge from the tax administration in its country of operation, which may argue that the amount of the licence fee exceeds that which would apply on an arms’ length basis. If the licence fee is subsequently lowered, the subsidiary’s liability to corporation tax may increase. However, the tax administration in the parent company’s country of operation may not agree the corresponding reduction in the parent’s revenue – and this may result in double taxation.
Other tax considerations may also be relevant, depending on the specific tax legislation in each relevant country.
Intercompany agreements or ‘ICAs’ are legally binding agreements which define the terms on which services, products and financial support are provided between associated enterprises, such as members of a group of companies.
ICAs are a key part of transfer pricing compliance. They are the starting point for ‘delineating’ the transaction between related parties, as well as assessing the allocation of risk, which often affects an arm’s length price. They are also part of the formal documentation which multinational groups are required to maintain for the purpose of TP compliance.
Finally, from a practical perspective, ICAs are often among the first documents which tax inspectors ask for in a TP audit. If the ICAs don’t match the group’s claimed TP policies, the other TP documentation, or the actual conduct of the relevant entities, then the taxpayer is on the back foot. This may lead to protracted investigations and ultimately fines, penalties, adverse adjustment and double taxation.
One of the central issues in this particular case concerned the relationship between Coca-Cola’s ‘HQ’ in the USA, and local ‘supply points’ in countries such as Brazil, Chile, Costa Rica, Egypt, Ireland, Mexico and Swaziland. The supply points in question were companies within the Coca-Cola group which manufactured concentrate, which was sold to separate ‘bottlers’ in Europe, Africa, Asia, Latin America, and Australasia. The bottlers produced and distributed the actual beverages.
The group’s transfer pricing policies during the relevant period (2007 – 2009) provided for profits to be split between the HQ and the supply points. The group applied a ‘10-50-50’ profit split method. This permitted the supply points to retain profit equal to 10% of their gross sales, with the remaining profit being split 50%-50% with the HQ.
As part of the justification for this profit split, the group claimed that valuable intangible assets (including intellectual property and goodwill) was owned by the local supply points rather than the HQ.
The US Tax Court disagreed, and found that this profit split methodology did not reflect arm’s-length norms because it over-compensated the supply points and undercompensated the HQ for the use of its intellectual property. The Court’s adjustments increased the HQ’s aggregate taxable income for 2007- 2009 by more than US $9 billion.
One of the problems faced by Coca-Cola was that the intercompany agreements in place during the relevant period (2007 – 2009) were entirely unsupportive of the taxpayer’s position regarding the ownership of intellectual property and marketing intangibles. In effect, the relevant ICAs said that all relevant intellectual property was owned exclusively by the HQ.
The Court made extensive comments on the legal analysis, including the following:
“The supply points … owned few (if any) valuable intangibles. Their agreements with [the] petitioner explicitly acknowledged that [The Coca-Cola Company in the US] owned the Company’s trademarks, giving the supply points only a limited right to use [the] petitioner’s IP in connection with manufacturing and distributing concentrate.” (pp 116, 117)
In other words, the group’s intercompany agreements directly contradicted the TP analysis put forward by the group.
The Court firmly rejected the contention that the taxpayer could bring economic evidence of the value of the functions performed by supply points, in order to overturn the unfavourable legal position. When referring to the relevant US income tax regulation, the Court commented as follows:
“Notably absent from this regulation is any provision authorizing the taxpayer to set aside its own contract terms or impute terms where no written agreement exists. That is not surprising: It is recurring principle of tax law that setting aside contract terms is not a two-way street. In a related-party setting such as this, the taxpayer has complete control over how contracts with its affiliates are drafted. There is thus rarely any justification for letting the taxpayer disavow contract terms it has freely chosen.” (p 161)
In addition to the lack of alignment with TP policies, the US Tax Court also identified other deficiencies in Coca-Cola’s intercompany agreements: in some cases, the contracts were “outmoded” and “inconsistent with … actual behaviour”. Certain of the agreements “included no discussion of payment whatever”, and the “10-50-50” profit split method did not appear to be reflected in any of the agreements.
It is fair to say that Coca-Cola’s defective intercompany agreements were not the only factor which lead to the IRS’s victory in the US Tax Court. It is also fair to say that the tax laws of different countries take differing approaches when assessing the form and content of ICAs, as opposed to the economic analysis of the arrangements. However, the case does illustrate how tax administrations are increasingly seeing ICAs as a weak point in the tax compliance of multinational groups, and are challenging taxpayers’ TP policies when they are not supported by intercompany agreements.
For many intellectual property lawyers, it may be natural to be mainly concerned about helping their clients with the protection and enforcement of IP as against third parties. They may be less concerned about where IP sits within a corporate group, and they may assume that IP should be centralised within the parent company or IP holding company. This assumption may have lead to the situation that Coca-Cola found itself in, which proved to be a very costly mistake.
One of the many valuable lessons we can take from the Coca-Cola case is the importance of the internal management and governance of IP within a group: the ownership and licencing of IP as between members of the group needs to be reflected in intercompany agreements which are aligned with the group’s transfer pricing policies and which meet the needs of the wider stakeholders involved.
The key action points for IP professionals may be summarised as follows:
1. When working with multinational groups, question your own assumptions as to how IP should be owned and licensed within the group. Encourage your clients to take into account all the relevant considerations – these may include withholding taxes, VAT and GST, exchange control and asset protection, as well as TP compliance and IP enforcement.
2. Make sure that your clients have appropriate intercompany agreements in place regarding the ownership and use of IP. These agreements need to be aligned with TP policies as regards ownership of the rights involved and the extent of the rights granted, the functions (obligations) of the parties, the allocation of risk and the calculation of licence fees and royalties.
3. Exercise caution when using templates for third party agreements as a starting point for the drafting of intercompany agreements; in many cases, such templates lack the specific TP functionality required, contain inappropriate provisions, and reflect an inappropriate allocation of risk.
Managing the TP aspects of M&A integration: TP Masterclass interview with Adnan Begic
We recently began a new series of Transfer Pricing Masterclass Interviews. The first was with Adnan Begic, a hugely experienced and widely admired expert on the subject, who is Head of Transfer Pricing Asia-Pacific for the Michelin group.
The starting point for the interview was the fact that traditional TP due diligence on a target group rarely covers the issues which make the biggest practical difference for the buyer.
So I asked Adnan to walk us through his thought processes when faced with a new M&A target, from the perspective of the TP / tax function of the buying group.
The key issues that he raised included:
You can see the 30-minute interview in full here. We’ve also included a transcript of the conversation.TP Audits – Get Your ‘Hard Hat’ at TP Minds International!
It’s TP Minds International this week, and I’m looking forward to contributing to a panel discussion on ‘Managing TP Audits and Defending Your TP Position’ on Wednesday 16th at 13.05 BST. The discussion will feature Catherine Harlow, Head of TP at AstraZeneca and Kurt Wulfekuhler, TP Director at Verizon Communications, and will be chaired by Anton Hume, International Tax and TP Partner at BDO LLP.
The panel discussion will be a great opportunity to discuss themes such as mock TP audits, ‘horizontal tax monitoring’, the role of agreements in TP audits, practical approaches to managing audits when they arise, as well as MAPs and dispute resolution.
Fixing gaps and errors in intercompany agreements is of course a key part of getting ‘audit ready’. As you may know, my colleagues Leiza Bladd-Symms, Ivan Hanna and I will also be hosting a roundtable discussion on that subject at TP Minds International. The roundtable session will start at 12.20 BST tomorrow, 15th June.
We will explore key questions challenging practitioners such as:
If you’re planning to attend the conference, please do drop by on both sessions, and I look forward to seeing you there.New vacancy at LCN Legal: Mid level / senior corporate lawyer
Summary of new vacancy: mid level / senior corporate lawyer
LCN Legal is seeking a mid level / senior corporate solicitor / associate to join our dynamic and ambitious team.
We offer a unique combination of benefits, including a clear route to partnership:
The successful applicant must have a solid grounding in the management and delivery of corporate projects, and experience in managing and developing client and referral partner relationships. Equally important is adaptability and enthusiasm for the opportunity to grow within a niche corporate practice which has huge opportunities for UK and global expansion.
Experience of transfer pricing compliance and international group structures would be an advantage but is not essential.
About LCN Legal
LCN Legal is a fast growing and award-winning boutique law firm, recognized internationally as leading the way in the legal design of group and supply chain structures for multinational groups. With a general focus on corporate and investment structures, we concentrate primarily on:
In 2020 we won the Law Society Award for Excellence in International Legal Services and we have recently been shortlisted for the Legal Business Awards to be announced in September 2021.
More information about LCN Legal, our client projects and team can be found on this website.
The successful applicant will be responsible for, among other things:
More important is the ability to demonstrate a strong work ethic, a proactive sense of initiative including when working remotely, and a genuine interest in working with our team and helping us to grow the firm and each of our practice areas.
Remote working and the need to accommodate time zones
All of LCN Legal’s staff work remotely, and this was the case even before Covid-19. Successful candidates must therefore be able to provide a suitable home office environment. Once Covid-19 restrictions allow, generally we meet as a team at least once per month and we have regular weekly (or, at times, daily) client project and leadership video calls. During normal times, we also meet more regularly for client and referral partner meetings.
As much of our work is for clients based outside of Europe, we often need to be flexible when arranging the times for calls with clients and referral partners. The Americas and APAC are our fastest-growing markets, and so this flexibility may mean working later or earlier in the day at times. We also provide a significant amount of support for clients and advisers in the APAC region.
What we offer
For the right candidate, we offer a welcoming and supportive team environment including:
How to apply
If you would like to apply for this position, please email us at firstname.lastname@example.org.
Please make the subject line of your email “Application: mid level / senior corporate lawyer”.
Please briefly explain in your email who you are and why you are interested in a position with us.
And please attach your CV in the form of a PDF document. Your CV should be no more than 2 pages in 11 point text.
We look forward to hearing from you. We’ll do our best to acknowledge all applications within 7 days.
No agencies please.
Some TP methods – specifically, the cost plus method – imply a specific drafting structure for pricing clauses in intercompany agreements (ICAs).
Others do not. Take for example, the Transactional Net Margin Method (TNMM), aka the Comparable Profits Method (CPM). This method may suggest a drafting approach based on the relevant profit or margin, or may instead merely be a way of testing the result after the event.
This ambiguity often causes confusion.
Confusion can leave MNEs in a situation where their TP policies for material transaction types have not been legally implemented at all. Which in turn means that TP documentation purporting to describe how those policies have been implemented, risks being a sham.
It is not uncommon to find intercompany agreements which do not specify price at all, and instead leave it to the parties to agree prices on a case by case basis. This approach is sometimes used in commercial agreements between unconnected third parties, where the agreement merely provides a framework within with orders may be placed. However, such ‘agreements to agree’ are generally not recommended in the context of intercompany agreements, for a number of reasons.
Firstly, and most fundamentally, an agreement which does not set a price in an objectively ascertainable way fails to provide ‘audit-ready’ support for the intercompany charges which were actually applied in the relevant periods.
Secondly, if the pricing of a set of transactions for transfer pricing purposes relies on a level of return being guaranteed (for example, for an intragroup distributor), then there is no guarantee unless the level of return has actually been specified with legal certainty and forms part of a legally binding agreement. Although agreements to agree can be legally binding in some jurisdictions, many legal systems do not recognise them as creating legally binding obligations.
Thirdly, the decision by a party to an agreement as to whether to contractually assume a set of risks should clearly evaluated against the anticipated return. If no clear contractual framework for pricing is provided, the allocation of risk is not placed in context. In other words, the agreement looks fake because it is incomplete.
Fourthly, from a subsidiary governance perspective, leaving prices to be agreed on in individual orders or transactions would require the board of directors (or equivalent governing body or delegated authority) of each legal entity participating in the arrangement to make a decision on each occasion. This is rarely practicable. If the pricing of such individual transactions were to be determined centrally (for example, by a central finance function), this would amount to an abrogation of responsibility by the relevant boards and would not be a tenable approach.
These factors mean that in general, the approach for the legal implementation of TNMM / CPM arrangements through ICAs is the same as for any other transaction type:
Defective intercompany agreements can undermine your transfer pricing policies, and can give rise to unnecessary risks of adverse tax adjustments, fines and penalties.
The team at LCN Legal have created a suite of practical checklists which is designed to help multinational groups ensure that their intercompany agreements are aligned with their transfer pricing policies, and reflect the intended allocation of risk and pricing.
The checklists cover the following transaction types:
The checklists are based on our practical experience of helping corporate groups internationally to put in place effective legal structures and transfer pricing agreements (also known as Intercompany Agreements or ‘ICAs’). LCN Legal’s lawyers are recognised as experts in Intercompany Agreements, since its establishment in 2013, we have advised multinational groups with combined annual revenues of over USD 127 billion; and we have been featured in a range of respected journals including Tax Journal, Finance Director Magazine, Accountancy Magazine and Thomson Reuters’ Practical Law.
Download your checklists below:
One of the most interesting audience responses we got from TP Minds Americas last month was in relation to the question ‘How are intercompany agreements different from ‘traditional’ agreements?’
The overwhelming majority of respondents chose option B: ‘No difference – ICAs should be as similar to third party agreements as possible.’
This misconception may account for the ridiculously long intercompany agreements we often come across (e.g. 60 pages for an intra group distribution agreement). One of the problems this causes is that, understandably, no-one reads the agreements until it’s too late.
The tax team just reads the pricing clause, and ignores the rest. The legal team thinks it has done a great job by providing a ‘market standard’ distribution agreement, but in fact the risk allocation and IP ownership provisions directly contradict the stated TP policies.
The result is often that such agreements are a liability, rather than an asset, when it comes to responding to a tax audit. Another, less visible, result of this misconception is that many tax and TP teams regard intercompany agreements as harder to implement and maintain than they actually are. So the job doesn’t get done at all.
It’s a bit like teaching your children to brush their teeth. Yes, you could get a PhD in dentistry. And you could instigate a year-long research program on the best possible toothbrushes and toothpaste on the market. But if you implement the basics – a habit of flossing and brushing all your teeth twice a day, you’re probably 98% there.
Here’s a slide which sets out our view of the 8 key ways that ICAs are typically different from traditional agreements.
And yes, there are exceptions: such as intra group services provided to regulated entities, which may be regarded as ‘outsourcing’ arrangements from the perspective of the service recipient. Or situations where an internal CUP is being used, and intercompany transactions can be documented (and managed) on terms identical to those used with third parties.
But those situations are most certainly the exception, rather than the rule.How can we future-proof our intercompany agreements?
This is one of the most common questions which come up at the training sessions we run on intercompany agreements for TP compliance.
The short answer is “You can’t.”
You can sign a piece of paper saying that the duties of the parties, the pricing and the risk allocation will automatically adapt to whatever your TP policies might say at any particular time. That might make you feel better today, but it’s not going to help you survive tax audits in the future – or any other kind of audit, for that matter. Because it doesn’t set out what the parties have agreed to do. It’s not a real contract.
However, there are ways you can reduce the ongoing administration of managing intercompany agreements (ICAs). One of those is to use a ‘Netflix’ approach to pricing clauses – in other words, create a contractual mechanism so that one party can unilaterally give notice to the other parties that the pricing has changed.
A bit like the way that banks notify us about changes to interest rates. Or the way that Netflix notifies its customers of changes to the monthly subscription fee.
There are a couple of caveats to the use of this approach, from a governance perspective.
Firstly, it’s unlikely to be appropriate if the quantum of the intercompany charge involved is financially significant from the perspective of the paying party.
Secondly, the ICA should usually provide that the new price only takes effect after a reasonable notice period (which should be specified).
Because of these factors, the most common application of this approach is for support services provided by a parent company or central entrepreneur to multiple service recipients.Transfer Pricing Override Clauses – Yes or No?
We are sometimes asked to include ‘Transfer pricing override’ clauses in intercompany agreements (ICAs). These clauses are intended to adjust the contractual price to the price charged for tax purposes if there is a TP adjustment at either end of the transaction.
This sounds like a good idea: a clause which can go back in time and re-align agreements with TP outcomes. However, there are three main issues which mean that our view at LCN Legal is to avoid these clauses unless considered absolutely necessary.
The first issue relates to the golden rule that the pricing and other key terms in ICAs need to have legal certainty. A TP challenge could be made by tax administrations at both ends of the transaction. And at any given time, a TP adjustment claimed by one tax administration is unlikely to be immediately agreed at the other end … and may not be agreed at all. So the only workable way to achieve legal certainty is to link the TP override clause to TP adjustments made by one specified tax authority.
The second issue, which is more fundamental, relates to governance. This is the principle that ICAs are not ‘fictional’ or ‘notional’ agreements which merely exist in the minds of tax geeks (much as we love tax geeks). In order to have any substance at all, ICAs need to be properly considered and approved by the directors of the respective legal entities involved.
Generally speaking, this requires intercompany transactions and ICAs to be as simple as possible, so that legal entity directors can receive a clear briefing on the arrangements, and can give their informed consent. In effect, this is a form of ‘Occam’s Razor’ – any unnecessary steps or provisions should be eliminated.
A provision which has a potentially significant retrospective impact, based on circumstances outside the control of the parties, would need a very strong reason to be there.
The third issue is that ICAs do not just impact on TP and corporate tax. They also have important implications for customs duties, VAT / GST and other considerations. This is another reason, in our minds for treating TP override clauses with caution. This is especially the case since TP challenges may occur a number of years after the transactions to which they relate.
What’s your view? Are we missing something important here?The four areas of alignment for legal implementation of TP
Although we publish detailed checklists for intercompany agreements, and to a great extent ‘the devil is in the detail’, sometimes it’s helpful to remind ourselves of the macro, helicopter view.
From this perspective, the 80 / 20 rule applies: 80% of the upside of getting intercompany agreements right (or the downside of getting them wrong) often comes from 20% of the content.
When it comes to aligning template intercompany agreements with TP policies for any given transaction type (or vice versa when it comes to after-the-event TP documentation), there are four key areas:
1. Functions: The who-does-what of the agreement (core duties of the parties and the nature of the services / goods / intangibles / finance provided) obviously needs to correspond with the TP policies and documentation.
2. Pricing: The pricing provisions and payment terms must clearly reflect the TP method applied. No TP adviser would want their client to be in the situation described by the US Tax Court’s in the Coca-Cola case: “Although [The Coca-Cola Co.] used the 10-50-50 method to compute royalties payable by the supply points, it never incorporated any aspect of that formula into its written supply point agreements.”
3. Risk: To the extent that the contractual allocation of risk is economically significant (e.g. inventory, product liability, credit, IP infringement risks), that allocation must be incorporated into the agreements in legally binding clauses. Otherwise the group’s TP policies have not been implemented, and any TP documentation suggesting otherwise lacks reasonable care and may even amount to deliberate concealment.
4. Ownership of intangibles: This includes pre-existing intangibles as well as intangibles created during the course of the relationship. Particular care should be taken with marketing intangibles, which may cover a number of different things from a legal perspective (local trade mark registrations, local goodwill, customer contracts, customer connections, user data, and so on). A high level view has no value unless it’s clear.
As a reminder, we’re looking at the issue of alignment from two perspectives:
If you’d like to understand this in more detail, you can find our detailed checklists here.HMRC Consultation on New Mandatory TP Documentation
On 23 March 2021, HMRC issued a consultation document on proposals to introduce new mandatory requirements for TP documentation.
By way of background, the consultation document notes that in the last 5 years (2015/16 to 2019/20), HMRC has brought in over £6 billion in additional tax from transfer pricing compliance activities. Transfer pricing therefore continues to be a significant area of tax risk for HMRC and for large businesses.
UK businesses are already required to keep records to demonstrate that their tax returns are complete and accurate, including in respect of any figures affected by the transfer pricing rules. However, HMRC does not generally prescribe specific records that UK businesses must prepare or the format of those records. In particular, TP master files and local files have not been mandatory in the UK to date.
In that respect, HMRC’s current approach to transfer pricing documentation requirements is not aligned with that of other tax authorities.
The proposals on which HMRC is seeking views include the following:
HMRC notes that “a common difficulty in transfer pricing enquiries relates to distinguishing underlying facts and evidence from technical opinions.” These proposals are intended to provide greater transparency on evidence underpinning the facts.
As the consultation notes, most corporates within the scope of CBC reporting will already be preparing TP master files and local files anyway. But few advisers or taxpayers will welcome the introduction of new, country-specific requirements for TP documentation which go beyond OECD requirements.
From a global perspective, this consultation arguably reflects the general trend for tax administrations to require more coherence in TP policies and more evidence regarding their implementation – including the legal terms of intercompany transactions as documented in intercompany agreements, in line with OECD requirements.
The deadline for submissions in response to the consultation is 1 June 2021.
You can access the consultation document here.How to scope the Intercompany Agreements you need for Transfer Pricing Compliance
Accurately scoping out intercompany transactions is the essential first step in creating, reviewing or updating intercompany agreements for TP compliance. Unless this is done correctly, the resulting agreements are likely to be gibberish, and your TP objectives may fail for lack of legal implementation.
The need for alignment between intercompany agreements and TP analysis of risk has been reiterated by recent IRS guidance addressing perceived defects in transfer pricing documentation (See the answer to Q4 of the FAQs, “Risk analysis should be consistent with intercompany agreements”).
Sometimes it’s obvious what the legal nature of the transaction should be, and who the parties are. For example, central support services provided by a parent to its operating subsidiaries.
Sometimes it’s not so obvious. For example, profit split arrangements or procurement hubs.
We’ve created a new 15-minute video to help you cover the basics of scoping.Not another rebranding fail
Corporate rebranding projects can be tricky. If you want a laugh, have a look at this short article listing 15 rebranding failures, including some shocking ones such as MasterCard and Gap:
So why are we rebranding?
We’ve come a long way since we first started in 2013. We now do more business in 2 weeks than we did in the whole of our first year. (Which sounds more impressive than it actually is – we started slow!)
We’ve also got a lot clearer about where we’re most needed – which is bridging the gap between ‘tax’ and ‘legal’, and helping multinational groups to maintain structures which give them genuine substance for tax and transfer pricing purposes. Obviously, those structures also need work from a legal and practical point of view, which is where our background as commercial lawyers comes in.
Within that space, we’ve helped multinational groups with a total revenue of more than US$ 130 billion. Most of those groups are not headquartered in the UK – they’re in places like the US, Switzerland, Dubai and Australia.
Recent developments such as the US Tax Court decision in Coca-Cola have highlighted what everyone already knew, but many were turning a blind eye to: adopting TP policies but forgetting to implement them was never a good idea, nor were ‘fake’ agreements which made no commercial sense, nor intercompany transactions which had not even been communicated to legal entity directors, let alone approved by them.
This has all meant that our focus has had to change, and our core offering is now providing outsourced maintenance of intercompany agreements and related structures, as opposed to ad hoc advice. (See our flyer here.)
Anyone who has followed us from the beginning will know that our business also serves the property market, including property joint ventures, funds and SPVs. As part of our rebranding, we’ve decided to separate that out into its own website, so that it can run its own course.
How did we come to choose the new logo for our ‘main’ business serving multinational groups?
The dots around the ‘L’ in ‘LCN’ symbolise the different stakeholders for each multinational group which is the heart and central focus of business. Although we are admittedly very smart when it comes to legal matters, we’re not the source of all knowledge. The legal architecture of a multinational group needs to reconcile potentially conflicting needs – including regulatory, tax, customs, asset protection, sales and so on. A cross-functional, collaborative approach is essential for making this work.
You can see our new website in all its glory here.
Finally, we would like to say thank you to everyone who has supported us on our way, and to you in particular, if you’ve bothered to read this far. As you may have gathered, we’re passionate about providing the best possible support for our communities, and to expanding our awareness of whether we need to improve our knowledge. Now, more than ever, we are extremely grateful for your support, and for holding us to account as we continue to improve.
LCN Legal appoints new partner to support growth
This is a sensitive subject for many TP advisers.
How long is long enough?
Of course, I’m talking about the duration of intercompany agreements.
Only this week, a Big Four TP adviser suggested that a 6 month notice period was ‘impracticably long’.
Maybe that individual hadn’t read the OECD Guidance on the TP aspects of Covid, which references a 5 year agreement, and how an agreement can ‘play out’ in terms of pricing and risk. The guidance also emphasises the need to consider periodically whether the terms of agreements need to be renegotiated.
Imagine you’re setting up an advisory business. You’re hiring staff and leasing premises. You’ve got just one client, which has agreed to pay fees which gives you a modest return on costs. The catch is that the client insists on a one month break clause.
How would you feel about that as a director? As the person on the hook for meeting payroll?
The inconvenient truth is that the length of notice periods does matter. Because it’s a fundamental commercial term.
We’re not saying that groups should overcomplicate things. Or create unnecessary admin.
We are saying that the legal implementation of TP needs to make commercial sense, and needs to respect the duties of legal entity directors.
And sometimes longer is better.
LCN Legal, the niche law firm specialising in the legal implementation and maintenance of corporate structures and intercompany agreements for multinational groups, has appointed a new partner from within its ranks.
Ivan Hanna, who joined the firm in 2016 following a legal career including Baker & McKenzie, with posts in London, Moscow and Amsterdam, Accenture and The Phoenix Group (the UK’s largest life insurance consolidator), became a partner as of 1st February 2021.
A fast growing and award-winning boutique law firm headquartered in London, LCN Legal is recognised internationally as pioneers in the legal design of group structures for multinational organisations. The firm was the winner of the Law Society’s 2020 ‘Excellence in International Legal Services’ award.
Ivan’s corporate, M&A, restructuring and related legal experience have proven invaluable to the firm’s clients and colleagues alike. In recent years, he has focused on international corporate structures and, in particular, Intercompany Agreements which multinational corporates need for their legal and Transfer Pricing compliance. Together with Paul Sutton and Leiza Bladd-Symms, Ivan forms part of the senior legal team which spearheads LCN Legal’s practice in creating legal substance for Transfer Pricing compliance.
Xiaofang Sutton, CEO and Co-Founder of LCN Legal, said: “Ivan’s partnership reflects the invaluable contribution he has already made to the growth of LCN, and his dedication to the future expansion of our firm. His positivity and passion are a true asset, and we are excited to embark on the next stage of our firm’s journey together.”
Commenting on his appointment Ivan added: “It is a great honour to be part of the award-winning team and assisting multinational groups with their corporate and supply chain structures.
“It is also a pleasure to be part of an outstanding international community of clients and professional advisers. I cannot thank the key players in this community enough for their support and collaboration over the years in assisting our mutual clients globally in every step of their growth and I look forward to what will undoubtedly be a bright future of continued collaboration and innovation together.”
Since its establishment in 2013, LCN Legal has advised multinational groups, with combined annual revenues of over USD 130 billion, on their Intercompany agreements and group structures. The firm works alongside leading tax and transfer pricing professionals across five continents, helping large corporates to maintain the legal structures they need.
LCN Legal is seeking two highly experienced paralegals or junior solicitors / lawyers to join our dynamic and ambitious team.
Following a period of training and oversight, the successful applicants will be responsible for, among other things:
Experience with international group structures (and, for one of the vacancies, property investment structures) would be an advantage but is not essential.
More important is the ability to demonstrate a strong work ethic, a proactive sense of initiative including when working remotely, and a genuine interest in working with our team.
Each successful candidate will work primarily with one of our senior lawyers, but will also support the wider team.
About LCN Legal
LCN Legal is a fast growing and award-winning boutique law firm, recognized internationally as leading the way in the legal design of group structures for multinational groups. With a general focus on corporate and investment structures, we concentrate primarily on:
Remote working and the need to be flexible regarding working hours
All of LCN Legal’s staff work remotely, and this was the case even before Covid-19. Successful candidates must therefore be able to provide a suitable home office environment. Once Covid-19 restrictions allow, we meet as a team at least once per month and we have regular weekly (or, at times, daily) client project and leadership video calls.
Because much of our work is for clients based outside of Europe, we often need to be flexible when arranging the times for calls with clients. The USA and the Americas is our fastest-growing market, and so this flexibility may mean working later in the day. We also provide a significant amount of support for clients and advisers in the APAC region.
What we offer
For the right candidates, we offer a welcoming team environment including:
How to apply
If you would like to apply for either of these positions, please email us at email@example.com.
Please make the subject line of your email “Application: senior paralegal / junior solicitor”.
Please briefly explain in your email who you are and why you are interested in a position with us.
And please attach your CV in the form of a PDF document. Your CV should be no more than 2 pages in 11 point text.
We look forward to hearing from you. We’ll do our best to acknowledge all applications within 7 days.
No agencies please.
Do you have any ‘ugly cousins’ in your group legal structure?
I hasten to say that none of my actual cousins are ugly.
But in the legal world of multinational groups, ‘ugly cousins’ are common.
Coca-Cola is a prime example. The Court said the group’s intercompany agreements were ‘outmoded’ and ‘inconsistent with their actual behavior’. Some agreements contained ‘no discussion of payment whatever’. Other pricing clauses bore no relationship to the charges actually applied. Most significantly, the agreements contradicted the claimed ownership of intangibles.
The court likened the TP analysis claimed by the company to a ‘Rube Goldberg machine’ (pictured).
It’s unfair to judge actions in 2007 according to 2021 standards. It was probably just a matter of ‘we’ll sort it out next year when we have time’. We all procrastinate.
At LCN Legal, we don’t claim to be the answer to all your TP problems.
But we can take one thing off your shoulders: keep your legal structure updated so that it matches your TP.
It’s like maintaining a property. We check alignment and coverage of agreements. We liaise with your team on a periodic basis to identify changes. And we fix issues as needed.
The result: a maintained, tax-audit-ready archive of signed agreements.
With no ugly cousins.
Please enquire by using the form below.