Intercompany agreements for transfer pricing – when is backdating OK?

This article contains adapted extracts from our guide for Tax and Transfer Pricing professions on how to put in place effective intercompany agreements for transfer pricing.

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One of the most common legal issues which arises in the context of intercompany agreements is whether a particular agreement can be backdated. The short answer is ‘no’. Giving a document a date which is earlier than the date when it was actually signed would almost certainly constitute fraud.

Clearly, the ideal position is to put in place the relevant intercompany agreement in advance, as with any commercial arrangement. The options available here depends on the proposed terms of the agreement, and whether it can be said that the relevant arrangements are already in operation.

1. Documenting arrangements which are already in operation

One possible scenario is that the relevant supply arrangements are already in operation, but they just have not been documented yet.

For example, head office services may have been supplied from a particular historic date, as reflected in the functional analysis. In this situation, it may be possible to create a document after the event which recites what actually happened and which records the key terms of the supply. The document should be dated when it is actually signed, but it can refer to the historic effective date of the transaction.

This approach may be harder to justify where the arrangements are unusual or where a particular contractual risk profile is intended, which is not clearly evidenced by the conduct of the parties – such as limited risk distribution arrangements.

2. Documenting a transaction which has not yet happened

In other cases, it may not be possible to say that the relevant arrangement has already been in operation, but it may still be desirable to achieve a ‘backdated’ effect. In this situation, it may be possible to put in place an agreement now, with a historic ‘effective date’.

For example, a group may want to move from a distribution model for the sale of goods (where local subsidiaries hold or acquire legal title to the relevant products and sell them on to customers, bearing commercial risk) to an agency model (where local subsidiaries act only as introduction agents, and take no credit risk or other commercial risks in the sale of the products). The seller/principal may agree with the local sales companies to treat the arrangements as they had been in place as from the previous year end. This could involve putting in place agency agreements now, which are dated when they are actually signed.

The agreements could specify, among other things, that revenue and risk would be apportioned by reference to the historic effective date, with adjusting payments being made accordingly. This type of arrangement would not bind third parties, but it may be effective from an accounting and tax perspective depending on the time which has elapsed since the intended historic effective date.

Whenever any form of backdating is proposed, it is important to review the facts carefully. Additional due diligence should be considered in order to manage the risk of any unintended liabilities being triggered, and to make sure that the legal effect of the relevant arrangements is as intended.