Intercompany Agreement Health Check Reviews

LCN carries out specialist health check reviews of intercompany agreements, ensuring they are effective and aligned with your transfer pricing policies.

Our reviews and ‘mock audits’ give multinational corporations assurance that their transfer pricing policies are legally implemented, and that the group will be able to respond confidently to transfer pricing audits and due diligence information requests.

Intercompany agreements are often one of the first documents requested in a transfer pricing audit. A defect in a single clause can fundamentally change the economic nature of the arrangement, and therefore the transfer pricing analysis. Our intercompany agreement health check reviews allow corporates to identify and fix issues proactively, and avoid exposure to significant costs and expenses.

Common defects identified in our health check reviews include:

• Mischaracterisation of the legal nature of controlled transactions
• Lack of commerciality and legal substance in controlled transactions
• Contractual allocation of risk and reward contradicting transfer pricing policies
• Legal ownership of intangible assets contradicting transfer pricing policies
• Pricing clauses ineffective and misaligned with price setting policies
• Inconsistent treatment of allocation keys and pass-through costs
• Inappropriate procedural provisions
• Ineffective attempts to ‘backdate’ contractual arrangements
• Unnecessarily complex agreements which fail to explain the commercial substance of the arrangements
• Failure to comply with US Treasury Regulations as regards the legal functionality and timing of agreements

The output of each of our health check reviews is a clear report which addresses the four key areas of alignment (nature of the transaction, allocation of risk, ownership of intangibles and pricing), and compares the operative provisions of the agreement with how the transaction is described in the relevant transfer pricing documentation.

We highlight any gaps or discrepancies using a ‘traffic light’ system: red for a clear discrepancy or issue, amber for a potential issue, and green where no issues are identified.

In addition, we give our view on whether the agreement is fit for purpose and how the agreement can be optimized, based on our experience of international best practice. This gives the group a clear picture of what action it needs to take.