Step by step
Our client for this project was a publically listed multinational group in the software sector. The group has a decentralized management team (in APAC, Middle East and Europe).
Our first introduction to the group came about because, working with their transfer pricing advisers, they had commissioned a large and well-known law firm to write some intercompany agreements. The transfer pricing advisers felt, however, that the results were not up to scratch, and so they recommended us to the client instead. Our fixed-fee proposal was approved, and we have been working with them ever since.
After we had completed the initial ICA project successfully, the client asked us to work with their tax team on a reorganisation project. The group is quite acquisitive, so it had to integrate the various different businesses it had recently brought in, and align them with its own structure.
The project was a debt and legal entity rationalisation, encompassing the UK, Europe and Asia Pacific. The two main goals were to rationalise the group’s intercompany debt and arrange for it to be capitalised or settled; and to simplify the European group structure, which involved reducing the number of legal entities by about half.
There were several reasons to undertake the project. Having many entities adds cost, and significant compliance work is involved in maintaining them. Reducing the intercompany debt would also lower the group’s exposure to foreign exchange risk. And a simpler structure is much easier to manage from an operational perspective.
Our expertise in the legal implementation of transfer pricing gave us extra insight into the groups’ structures and operations, which was very valuable in our work in the reorganisation. And our ability to work seamlessly and communicate effectively with the group’s tax advisers was also key. (Failure to do this can cause real problems in reorganisation projects, because issues can ‘fall between the gaps’.)
As always, there were various technical legal questions that needed to be resolved, and the legal side of things was further complicated by the fact that the project covered many jurisdictions, some of which (such as China) required different formalities to be complied with. But the really critical aspects of any group reorganisation project are managing the process and the communication.
We were able to do just that, ensuring that all the key stakeholders within the group were fully involved, and were consulted whenever necessary. The tax team set out a top-level plan that set out the key steps. We then fleshed that out into a detailed process, with a comprehensive list of legal documents and actions required.
At the time of writing, the initial reorganisation project is all but completed, and the group has already asked us to help them with the updating and extension of intercompany agreements following a further substantial acquisition in Asia.
This ongoing role is in line with our ICA maintenance service for them. At regular intervals we review our client’s group structure and intercompany transactions, identify any gaps in the coverage of intercompany agreements, and ensure that they remain aligned with the group’s transfer pricing policies as they evolve. This is particularly important for groups such as this one which are acquisitive, or which operate in a fast-moving sector, as these things mean that the group itself changes rapidly.
All the right moves
The client here is a technology-enabled business that supports multinational groups around the world. It’s a very strong business that is highly profitable and growing fast.
The client’s corporate structure wasn’t working well for them, for several reasons. A key problem was that from a governance point of view, the group was finding it difficult to recruit senior managers to the jurisdiction of its parent company. This meant that it was becoming increasingly difficult to maintain substance there for transfer pricing purposes.
The group therefore decided to restructure its entire operation, from governance functions and holding structure, to supply chains and ownership and control of intangible assets. This involved moving assets, functions and strategic decision-makers to new locations. One of many benefits was that the new structure would allow the group to adopt a new transfer pricing model with greater substance in all respects.
As with any restructuring project, the basic process is to (A) understand how things are working at the moment; (B) design a new structure that will achieve all the required objectives; and work out how to get from A to B. The first part of that was particularly difficult in this case, as the group was changing and growing so quickly that we were trying to hit a moving target. With that initial restructuring work completed, we created a completely new holding and finance structure for the group, and consolidated all of the group’s debt, thereby removing unnecessary foreign exchange risk.
As always, we managed the process, shepherding the project through its many stages, and keeping the client exactly as informed as they wanted and needed to be. In every project, the person who is our main key contact in the client’s organisation inevitably has to report to other senior people, so it’s essential to keep them regularly updated with all the key information about costs, progress against milestones, and so on.
At the time of writing, the initial restructuring is complete, and we have now moved onto the final phase of the initial project: re-writing all of the group’s global intercompany agreements in order to implement its new transfer pricing model. As the group is innovative and acquisitive, its structure and business divisions change rapidly, so it will be vital to regularly monitor the group’s operations, TP model and its intercompany agreements to maintain compliance over time.
Throughout the whole process, the ‘heartbeat’ of communications has been weekly project update calls, which have been held between the client’s CFO, LCN Legal and the client’s strategic tax adviser. This has enabled the core team to escalate issues, resolve blockages and adapt to the changing requirements of the group.
Taking the lead
We were instructed on this ICA project by a company that provides services in the fitness sector. It has a broad, global consumer base and is part of a large multinational group with a complicated corporate structure. As is very often the case, we were recommended to the client by their US tax advisers.
As always, the first task in this matter was to scope out the intra-group supply flows, so as to fully understand the value chain analysis and the way in which the group companies interacted with each other. Due to the particular complexities of this organisation, in terms of service supplies, intercompany loan arrangements and intellectual property ownership, this process was both fascinating and challenging.
In particular, it was necessary to reconcile the differences between the transfer pricing analysis of related party transactions, and the legal relationships involved. For example, the economic view of intellectual property ownership is not always the same when considered from a legal perspective, but a clear understanding of how the title to intellectual property is held within a group is pivotal to correct legal implementation of the group transfer pricing policy.
Our review resulted in the identification of eleven key transactions types. The next step was to draft bespoke intercompany agreements to document these supplies and to create a suite of standardised templates for future use.
From the client’s perspective, our value add comes from our ability to bring clarity to the complex issues involved and to take a collaborative, common sense approach. Our now deep understanding of the group has already led to us being asked to advise on several other sizeable projects.
Up to speed
Our client for this ICA project was a multinational group in the consumer products sector. Although the business was relatively young, it was already highly successful and had expanded rapidly with a presence in many countries across Australasia, Europe and the US.
As often happens with fast-growing companies, the group’s focus had been on managing that growth and keeping up with demand from customers and investors. This had taken attention away from equally important but less high-profile issues like developing internal processes. The business leaders realised that although this was not yet causing an immediate problem, there were several matters that need to be addressed including the adoption of a group transfer pricing policy and the legal implementation of the same.
We began by instigating a detailed review of the business, holding discussions with key stakeholders and reviewing documentation and process, until we had an in depth understanding of the group’s history and objectives, its intra-group transactions and how all this neede to be reflected in its intercompany agreements. An important part of managing this process and extracting the necessary information was to guide the client ensuring we asked the right questions in order to uncover issues that perhaps the client wasn’t aware of or did not determine as relevant.
As expected, we found a range of things that needed to be addressed, mostly stemming from the legacy of the group’s rapid expansion, such as inaccurate historic intercompany agreements that did not reflect the reality of the intra-group arrangements.
Once everything had been finessed and a bespoke and substantively accurate suite of documents provided to ensure the transfer pricing policy of the group was legally implemented, the main process was complete. The group’s directors could now focus on growth and their strategic goals, safe in the knowledge that their transfer pricing policies had genuine legal substance and would withstand scrutiny in a tax audit. As always, it’s important to continue to monitor the ICAs at regular intervals – particularly with a group that is growing as fast as this one.
There are other long-term benefits of carrying out the process too. We can share our understanding of the business: the provision of a clear legal picture is very useful to an expanding and acquisitive group . Having a fully functional suite of intercompany agreements also simplifies the ongoing process of maintaining compliant documentation within developing group of companies.