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Intercompany Agreements in the Examining Process for Transfer Pricing Cases

Intercompany Agreements

29 November 2022

The image on the left shows an extract from the IRS Internal Revenue Manual, confirming the factors to be considered by the relevant IRS team when reviewing intercompany agreements, as part of the examining process in transfer pricing cases.

It reads as follows (my italics):



(10) The issue team should request and perform a review and analysis of relevant intercompany agreements. Collaborate with LB&I Field Counsel to understand legal terms and content of intercompany agreements:

a. Determine the relationships of agreements to each other and to the transaction at issue.

b. Determine the relevant parties to the agreements and their relationship to each other.

c. Identify important terms of the agreements, including each party's rights to terminate the agreement or otherwise avoid or recapture associated benefits and burdens.

d. Identify pricing and forms of payment and circumstances that may affect whether the amounts specified will be paid.

e. Assess the risks assigned to the controlled parties. f.

Determine if the conduct of the parties is consistent with the form of the agreements.

g. Identify any pertinent legal issues, as well as relevant non-tax legal issues.

Elsewhere in the same manual, it is stated that:

“Generally, the contractual terms of a controlled transaction determine the controlled party that bears a particular risk. This allocation of risk specified or implied by the contractual terms should generally be respected if it conforms with the economic substance of the controlled transaction.”

This focus on contractual terms is not surprising: it is consistent with the approach set out in the OECD’s TP Guidelines. For many transaction types, risk allocation is a key factor in the pricing of intercompany transactions.

If a particular allocation of risk is implicit in a group’s TP policies but is not substantiated by the contractual arrangements, the discrepancy is likely to be picked up in a TP audit, in which case it may be difficult for the taxpayer to defend its position. The time and money spent by the group on transfer pricing advice and documentation may be wasted, and the group may be subject to substantial costs in terms of adverse tax assessments, fines, penalties and disputes.

Our ICA Healthcheck tool

To help multinational groups and their TP advisers avoid this situation, we have created a tool which allows them to review their agreements in a structured and systematic way.

The output is an easy-to-read, colour-coded report, which covers the four key areas of alignment between agreements and TP policies.

It highlights areas and issues which may require further attention, so that corrective action can be taken now – minimising the risk of TP challenges and adverse TP assessments in the future.

The tool is in ‘Beta testing’ stage. Please try it out – it’s free, and no registration is required. You can access it here.

If you have any suggestions as to how the tool can be improved, I will be delighted to hear from you.

You may remember that I talked about this ICA Healthcheck tool in my email three weeks ago, in which I also told you about a free webinar on document automation. That has now taken place, and you can access a recording here. I think you’ll find that it’s half an hour well spent.

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance