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Schrödinger’s cat and intercompany agreements

Intercompany Agreements

30 July 2019

Erwin Schrödinger was Nobel Prize-winning Austrian physicist. You’ve probably heard of him. He created a thought experiment in 1935 to point out the contradiction between what quantum theorists held to be true at the atomic and subatomic level, and what the average person observes to be true on the macroscopic level.

The experiment went something like this:

‘A living cat is placed into a steel chamber along with a hammer, a bottle of poisonous gas and a small amount of radioactive substance. If even a single atom of the radioactive substance decays during the test period, a relay mechanism will trip the hammer, which will in turn, break the bottle of poisonous gas and cause the cat to die.’

According the so-called ‘Copenhagen’ interpretation of quantum theory, the cat would be both dead and alive until someone looks in the box. This is referred to as ‘quantum indeterminacy’.

The point of Schrödinger’s experiment was to question whether this theory of quantum indeterminacy actually made sense. In his words: “[It] prevents us from so naively accepting as valid a "blurred model" for representing reality.”

In the past, many tax practitioners have taken a similar blurred view about intercompany agreements. In their world, the contractual relationship between associated entities during a given financial year existed in a closed box, which wasn’t opened until some time after the year end – and at that point, the agreements could say whatever you wanted them to say.

Of course this is nonsense from a legal perspective. So unfortunately, just like everything else in life, you can’t keep hedging your bets. At some point, you’ve got to give your best shot at designing a workable system of intercompany transactions and agreements, and building your compliance around that.

Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance