How long is arm’s-length?

How long is arm’s-length? This issue came up at a seminar on intercompany agreements hosted by Thomson Reuters Onesource at their Canary Wharf headquarters last Friday, at which I was guest speaker (thank you Sally, Amy, Dickson and Chris!). It’s a point we feel very passionate about and obviously we’re not doing enough to get the message out.

The specific question was along the lines of ‘can we get away with having short-form intercompany agreements, given that we are working within the arm’s length principle for transfer pricing purposes.’

From our perspective it’s not a question of ‘getting away’ with anything. It’s a question of choosing the right tool for the job. If you are taking your family of six for your weekly shopping trip to your local supermarket, you probably don’t want to take a jumbo jet. The parking might be a challenge. But equally, skateboards are probably not going to cut it either. You’ll probably want something with four wheels and seatbelts.

Take, for example, loan facilities – one of the most common forms of intercompany transaction. A typical ‘arm’s length’ credit agreement would often run to 200 pages or more, and that’s not including the security documents. It’s obvious that replicating that style of document in an intercompany context would rarely be appropriate, especially if multiple language translations are needed. Nevertheless, intercompany loan agreements need to document the key contractual terms of the relationship, in order to provide a reference point for comparability.

The need to achieve an appropriate balance between brevity and functionality in intercompany agreements is probably even more important in transactions involving services, goods or intangibles. This is because there are usually more stakeholders involved, in order to address issues as VAT, customs, intellectual property, regulatory considerations and so on – the longer an agreement is, the less likely it is to be read, and therefore the greater the risk of it not meeting the needs of the group as a whole, or not reflecting an arrangement which is capable of being followed operationally.

FYI: We’ve recently released the dates for our forthcoming webinars up to February next year, on various subjects involving intercompany agreements for Transfer Pricing compliance. You can view the programme, and reserve a place for any which are of interest, here.