We always start with the end in mind: in a tax audit, will the intercompany agreements support the taxpayer’s TP position or undermine it? To achieve the right result, we follow a systematic process to implement appropriate agreements. We also monitor and maintain those agreements, to ensure they stay aligned with the group’s operations and TP policies.
Intercompany agreements, or ICAs, are one of the most important parts of any multinational group’s legal structure. They are also one of the most widely misunderstood. By ensuring that our clients’ ICAs are fit for purpose, we help them to avoid many serious risks.
Intercompany agreements define the legal terms on which services, products, intangible assets and financial support are provided within the group. Multinational groups dedicate extensive resources to preparing appropriate TP policies and documentation, but these policies are of little use unless they are implemented in legal reality, through appropriate intercompany agreements.
We ensure that our clients avoid the defects that can occur in ICAs. Some examples of these problems are:
- ICAs which contradict the allocation of risk described in TP documentation, meaning that historic tax filings are incorrect
- Gaps in the intercompany transaction types covered by ICAs, so that certain transactions are not legally documented at all, leaving risk allocation and price open to the interpretation of tax administrations
- Agreements that are too long, use legalese language, which contain administrative provisions that are not followed in practice, and/or are poorly structured. All of this makes it much harder to get the agreements reviewed by everyone who needs to do so. The result can be that the agreements do not reflect how the group actually works, or do not take into account the needs of an important stakeholder
- Out-of-date ICAs which no longer reflect the group’s structure, its contracting structure, or the operations of the relevant business units
- Agreements that are unsigned, undated, incomplete, or not centrally archived
- Agreements which have not been updated to reflect revised benchmarking or revised TP policies and models
- Failure to integrate newly acquired or incorporated legal entities
- Over-reliance on local tax managers to maintain files of signed intercompany agreements, with no assurance that they are complete, and no contingency plans in place if those managers are unavailable or have left the group
In so doing, we avoid the consequences of having ineffective ICAs in place, such as:
- In certain jurisdictions, corporate groups are routinely subject to fines and penalties, simply for failing to produce signed ICAs when requested
- Expenses may be disallowed
- Post year-end ‘true up’ or ‘true down’ adjustments may be rejected
- Local tax authorities may be more likely to attempt to re-characterise a transaction as something other than that claimed by the taxpayer
- Groups may be subject to adverse transfer pricing adjustments and associated fines and penalties
Since 2013, LCN Legal has advised multinational groups with combined annual revenues of over $130billion. We know all the processes that are required to create and maintain intercompany agreements.
Three things make LCN Legal unique
We are the leading experts in intercompany agreements. Our book ‘Intercompany Agreements for Transfer Pricing Compliance – A Practical Guide’ is the definitive work on the subject. Our online course on ICAs is recognised by the UK’s Chartered Institute of Tax, and by various other associations and organisations in other countries.
We have a global and cross-functional perspective. Around the world, large corporates and leading transfer pricing professionals choose us because we offer a unique skill set: we are commercial lawyers with an understanding of transfer pricing. This allows us to take a cross-functional approach to designing and implementing ICAs. We liaise with all the stakeholders involved (not just in tax) to ensure that the agreements support all of the group’s objectives.
We offer ongoing support and training to maintain audit-readiness. We focus on the end result that corporates need: a comprehensive central archive of signed intercompany agreements, which is aligned with TP policies and kept up-to-date. This enables them to respond quickly and effectively to tax audits, and reduces the risks of protracted investigations, adverse TP adjustments and double taxation.