Pain and gain in intra-group supplies

If you’re a fan of Anthony Robbins you’ll know that he regards ‘pain’ and ‘pleasure’ (or rather, the anticipation of pain or pleasure) as keys to consciously controlling our destiny. We can actively choose to associate massive pleasure with habits or beliefs we want to install, and massive pain with habits or beliefs which do not serve us.

In relation to the legal structure of multinational groups, evaluation of ‘pain’ and ‘pleasure’ (or gain) can similarly be used as a guiding principle to help assess the terms of an intercompany agreement, and whether a written agreement is required at all (aside from procedural requirements of BEPS compliance and local regulatory or tax laws). I believe this mirrors the way we view contracts in our business and personal lives – and whether we just click “I agree” when faced with yet another set of terms and conditions online, or whether we stop and get legal advice on a strategic business relationship.

For any given intercompany supply, the perspective of avoiding pain and securing gain can be applied from either end of a supply relationship – but more commonly, from the perspective of the legal entity which is not acting as ‘entrepreneur’ (on the basis that the entrepreneur is entitled to the residual profits arising from the underlying economic activities).

The following questions may be helpful:

‘Pain’

What’s the worst that could happen in the context of this relationship? E.g.:

  • Exposure to third party liabilities (e.g. product liability or regulatory claims)
  • Wasted cost or loss of investment (e.g. due to non-performance or defective performance)
  • Cost of potentially performing obligations at a loss
  • Inability to recoup costs already incurred or committed
  • Exposure to increased cost (e.g. due to fluctuations in purchase costs, exchange rates or interest rates)
  • Time and expense to secure an alternative supplier

‘Gain’

What’s the expected benefit that contractual terms could secure? E.g.:

  • Future entitlement to share in profits
  • Future entitlement to be compensated or indemnified against liabilities or losses
  • Ownership of a profit-making asset
  • Ability to exploit data, know-how or other intangible assets for profit-making purposes

If none of the issues raised by those questions is material (judged at the level of the legal entity involved, not merely at group level), then a written agreement may not be required. If material issues are raised, then the officers of the relevant legal entity are likely to be under personal duties to clarify the relationship by means of a written agreement, in order to be able to manage the risks involved.

If you’re anticipating potential pain because you know your transfer pricing compliance lacks the legal substance provided by appropriate intercompany agreements, we can help. Call us on +44 20 3286 8868 to arrange a free, no-obligation consultation.