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Is this TP clause clever or not?

Intercompany Agreements

27 September 2018

Earlier this week, one of our friends shared with us an unusual clause in an intercompany agreement (ICA). (Thank you Dawn!)

Here it is – I would be interested to hear what you think of it:

“If any provision of this Agreement is challenged by [name of tax authority] or any other tax authority in any other jurisdiction on the basis that it is not fully on arm’s length commercial terms, but would be on arm’s length commercial terms if some part of that provision were deleted or amended, that provision shall apply with such deletions or amendments as may be strictly necessary to make it on arm’s length commercial terms.”

Our view is that it’s not an approach we would recommend. Firstly, the arm’s length principle cannot be applied to a single “provision” of an ICA in isolation; the arm’s length principle relates to the conditions as a whole which are made between associated enterprises. Secondly, the provisions of ICAs are not just about transfer pricing compliance – they also fulfil other important functions, such as supporting corporate governance and managing potential liabilities of directors. So an ICA should not necessarily be amended, just because a tax authority at one end of a transaction raises a transfer pricing challenge.

Ultimately, ICAs should be all about substance, and not about “clever” clauses. Substance requires integrating transfer pricing considerations with other key issues, such as legal, corporate governance and regulatory compliance. That’s why we run training sessions and free webinars on the subject. On Thursday 11 October, we'll be holding a webinar on intercompany agreements for technology-rich companies. Places are free, but are allocated on a first come, first served basis. You can reserve your place here.

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Article by
Paul Sutton
LCN Legal Co-Founder

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