This summer marks our 12th anniversary at LCN.
If you work in transfer pricing or handle cross-border intra-group transactions, you’re the community we’re here to support, and we’re honoured to be on this journey with you
Here’s a summary of 12 key lessons we’ve learned in our journey
TP is just one of many stakeholders in intercompany transaction design.
When we started out, our focus was very much on ‘intercompany agreements for transfer pricing compliance’. This is still what we do, but a key difference now is that we’re not doing it just for TP. As Mick Edmundson would confirm, a key step in planning any project is to make sure all the stakeholders you care about have a seat at the table before you go ahead and plan anything. This includes regulatory compliance, IP enforceability, legal entity accounts and solvency issues, corporation tax deductibility, VAT, and withholding taxes.
Intangibles are the ‘crown jewels’ of almost every business – so treat them with the reverence they deserve.
In the early days, we would tend to accept at face value whatever the client told us about their intangibles and their relative value. Now we realise that part of our role is to push back against a narrow view of IP which focuses only on ‘brand IP’ or ‘product IP’ or copyright works, and ignores process-type know-how and broader intangibles. It’s not our skill set to value IP or to carry out functional analysis, but we can and do question the analysis of intangibles when it doesn’t look right from a common-sense perspective, particularly when it contradicts what the relevant group says about the value of innovation in its shareholder reports. If you’re not clear about what intangibles you actually have, or what processes you might need to have in place to manage them, speak to Donal O’Connell.
Lead with commercial rationality, not tax.
There’s nothing wrong with tax mitigation, as long as it’s lawful and you’re making the appropriate disclosures. In fact, this is arguably an important function of every C-suite. But as we’ve seen time and time again in recent international cases, when tax and TP becomes the driver, things tend to go wrong. Ultimately, we’re all in the business of designing commercially rational corporate structures and intercompany transactions. That’s by far the best place to start if you want to avoid unnecessary backtracking, delays, and bad news.
Don’t get faked out by narrow perspectives.
This follows on from the first lesson. A lot of people have a lot of opinions about a lot of things. Sometimes the loudest voice on a video call is the one from the person with the narrowest perspective, and actually makes no sense from a wider point of view. In particular, a lot of the ‘received wisdom’ about intercompany agreements (such as ‘if you keep them vague, they can never be wrong’) either no longer applies (because the world has changed) or was never true in the first place.
Transfer pricing only works in advance.
A big part of TP analysis is about risk and risk allocation. That’s why contractual allocation of risk is item 2 of the 6 OECD steps for delineating a transaction with respect to risk, and kicks in before any thought can be given to benchmarking or pricing. Risk only has a meaning in the future (when outcomes are unknown), and the ALP only makes when it is applied on a forward-looking, price-setting basis. Many groups have made this transition already, and are therefore able to use software tools to manage their TP positions pro-actively.
Work in financial years.
When we started out, a client or a TP adviser would ask us to help develop a draft agreement for a specific transaction, and that’s what we would do. Now, our first questions tend to be ‘what’s the intended commencement date?’ and ‘which financial year does this relate to?’. Because retrofitting the TP analysis, benchmarking, and agreements is hard and creates complications for multiple stakeholders.
Get your entities straight.
Having accurate information about the relevant legal entities at the relevant time sounds basic. But it’s often not as easy as you might think, especially for groups that have an active M&A strategy. It’s worth spending quality time up front to get crystal clear on this, including the relevant officers and signatories.
Keep your plumbing nice and neat.
We sometimes refer to ourselves as ‘corporate plumbers’, because connecting up intercompany transaction flows is a bit like connecting up the plumbing in a house. Keeping the plumbing (aka the transactions matrix) as clear and simple as possible makes it much easier for you to implement it, operate it, report on it and keep it maintained.
Use multiparty agreements as much as you can.
12 years ago, many clients and advisers preferred to use individual, bilateral intercompany agreements. The idea was that it gave the taxpayer more flexibility when responding to tax / TP enquiries. Nowadays, I would say that the default position is to use multiparty agreements wherever possible, because they demonstrate consistency, they reduce complexity and they reduce risk of unnecessary errors.
Apply the golden rule: would you sign? This is the golden rule for assessing any proposed intercompany transaction and the associated draft agreements. Choose any participating entity. Imagine you were the sole director of that entity. Does the agreement actually make sense as a commercial proposition? Would you sign it? If not, revise the agreement until you would. Repeat for all the other entities.
Set up reminders and review systems.
Everything in life falls apart if it’s neglected. It’s easy to look back at cases like Coca-Cola and ask how a group like came to neglect its TP policies and its agreements. But that was a different time and age. Now we know better: maintenance and updating is key. Setting up regular review points is one way that we look after our clients, and it’s essential if you want to avoid wasted costs and unnecessary tax challenges.
Start where you are.
Life is messy. Multinational businesses are complicated and constantly in flux. The economic and compliance environment is always changing. Tax teams within large corporates are often very small, and have to deal with huge pressures. What we’ve learned is to do our best to help clients get clear on where they might want to be (or need to be), but starting from where they are right now.