Legal form or economic substance? It’s the wrong question

One of the things I’m looking forward to in 2023 is the various workshops that we’ve scheduled on what it means for TP documentation and intercompany agreements to be tax audit-ready.

In order to be robust, appropriate agreements need to be in place in advance. Intercompany transactions which take place in 2023 may not be challenged for several years, by which time it’s too late to change the legal characteristics of those transactions. Attempts to re-engineer agreements retrospectively are unlikely to carry much weight.

In our workshops we’ll be looking at issues such as:

• Typical reasons why TP positions fail when they are challenged by tax authorities
• Recent trends in tax audits, and how this should inform our approach to documentation
• Where the creation and updating of intercompany agreements should feature into the tax compliance calendar
• What a risk-based approach to TP documentation might look like

If you’d like to arrange a similar session for your team, please reply to this email and let me know.

Some people think that this requires you to decide whether the legal form of an intercompany transaction is more important than the economic analysis, or vice versa. Indeed, this is frequently debated at TP conferences.

But 'form vs substance' is a false dichotomy, for two reasons.

First, the economic characteristics of a transaction cannot be analysed without regard to its legal form, and differences in the legal form of a transaction can completely change its economic characteristics. This is made clear by the OECD TP Guidelines, IRS guidance, and recent TP cases such as HMRC vs BlackRock.

Second, the question presupposes that there is a divergence between the legal form (terms of intercompany agreements) and the purported economic analysis. In fact, when such a divergence occurs, it's usually a sign that the taxpayer's TP compliance processes have broken down.

It’s completely possible to achieve alignment between agreements and TP policies. Indeed, it's not merely possible – it's essential if the relevant TP policies are to be robust.