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Is your group structure ready for the tax inspectors? I mean, really ready?

Group Reorganisations

Intercompany Agreements

26 February 2018

This article appears in the February edition of our International Corporate Structures Newsletter.

If you are a regular reader of this newsletter, and of our regular emails, publications, legal resources and guides, you will know that we are advocates of effective intercompany agreements and related structures for multinational groups. Of course we are; a group without intercompany agreements is like a human being without integrity – you may achieve sporadic results, but consistent success (however you define it) is not available to you.

The reason for this is very simple: a corporate group exists as the inter-relationship between the individual group companies. To respect those relationships, and to respect the personal duties of the directors and officers of those companies, requires close attention in defining each of those relationships (not only the elements relating to pricing), and creating an ecosystem in which governance, assets, people, risks and risk mitigation are aligned. The only way to do this in a transfer pricing compliance context is to put in place effective intercompany agreements that reflect the group’s operations, intercompany charging structure and, of course, its transfer pricing policies and related documentation.

This may seem like a ‘thick faced’ and harsh message. But as you will learn from the book review featured here, ‘thick face’ is a shield to use when speaking the truth – something my wife Xiaofang has no problem using when speaking the truth about my lamentable DIY skills at Chateau Sutton, to my great discomfort. But the truth is the truth.

One of the justifications we sometimes hear for procrastinating about intercompany agreements is that they have not been a major focus of tax inspections of that particular group. What’s missing at the end of that sentence is a big ‘YET’. The truth is that you will be betrayed by your own lack of inner peace. Oprah Winfrey defines true success as ‘peace’. I agree totally. Of course, integrity is a matter of personal choice, but if you choose peace and integrity, then positive action inevitably follows.

The same applies to the content of the intercompany agreements themselves. It’s easy to pay lip-service to the principles of governance and legal substance – just as it’s easy to pay lip-service to diversity and gender equality on pay – and produce contracts as a tick-box exercise. But substance always wins in the end. That's why, as part of the support we provide our multinational clients, we help them by reviewing the intercompany agreements they already have, and detailing the changes needed to make them fit for purpose, as well as filling the gaps where intercompany agreements are missing. (For more information about arranging a healthcheck for intercompany agreements, email us at info@lcnlegal.com.)

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance