It’s usually around 7.22 pm on a ‘school night’ chez Sutton. Coco (6) and Norah (4) are in the bathroom together, dancing around, laughing and generally having a riotous good time. That’s when the grumpy old git arrives and starts barking orders. ‘Can you just stop messing around, you two? It’s time for bed. Norah, have a pee and wipe your bum. You don’t need that much toilet paper. Now wash your hands. Properly. With soap. No, actual soap not pretend soap …’ and so on.
Unfortunately, embarrassingly, the grumpy old git is me. I’m not entirely sure why it happens. I’m probably trying to be efficient and get on with other things. Which is ironic, because what other things could possibly be more important? And of course being in the moment, and enjoying the perfection of life, is absolutely the only way to be – not just with children, but also with corporate structures, designing intra-group supplies and creating something with genuine substance.
Speaking of 'work not feeling like work', I read a very interesting article by Peter Steeds and Meenakshi Iyer of KPMG in last Friday's issue of Tax Journal: ‘The new transfer pricing landscape’. One of their points is that under the OECD’s 2017 Transfer Pricing Guidelines, the ‘Control of Risk’ principle is of equal importance with DEMPE analysis, and is not subsidiary to it. The ‘Control of Risk’ principle looks at whether the party assuming a particular risk actually exercises control over that risk, and also has the financial capacity to assume the risk.
From a legal viewpoint, financial capacity to assume a risk arguably trumps all other issues, when designing an intra-group supply chain. If a particular legal entity lacks the capacity to assume a risk under a proposed arrangement, then it is hard to see how its directors or other officers can properly approve that arrangement. If the arrangement is actually in operation, then legal rights and responsibilities will automatically arise between the parties under the applicable law, and the ensuing allocation or risk may or may not be appropriate; the lack of written agreements does not mean that there is somehow a ‘blank slate’. Written intercompany agreements are therefore an indispensible tool for corporate governance and managing personal liability risks for directors.
Another interesting issue raised by Peter and Meenakshi is the need for groups to evidence decision-making on intra-group supplies – and where possible, to maintain contemporaneous records of decision-making by relevant boards. In my experience, it is relatively rare for board minutes to record discussions or deliberations, and traditionally their function has been to record the outcome of decision. Whatever approach to documentation is taken, the interrelationship between corporate governance and transfer pricing compliance means that it is surely less and less viable for groups to adopt transfer pricing policies unless they are firmly grounded in corporate governance.
If you need help grounding your transfer pricing or corporate structuring in legal substance, we offer a free initial consultation to review the structure of your intercompany agreements. To request a consultation, just please email me at firstname.lastname@example.org. My colleagues and I will be delighted to talk to you ... unless it's time for bed and we're a little over-tired.