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Six Key Take-Aways from TP Minds Asia 2019

LCN Updates

Intercompany Agreements

4 October 2019

Following our sponsorship of TP Minds London in March this year, we followed the TP Minds world map and sponsored TP Minds Asia in Singapore last week. We were overwhelmed by the full house attendance at our pre-conference workshop on intercompany agreements, we immersed ourselves in the bountiful energies from TP professionals from the APAC region and benefited from the different perspectives brought by the speakers and delegates on the practical challenges faced by multinational groups. The following are our six key take-aways from TP Minds Asia this year.

The TP environment in the APAC region

  • Although different tax authorities clearly have differing approaches, a common factor is the increased resources available for TP audits within tax administrations, and the sophistication of their analysis

  • Tax authorities are increasingly taking a whole-of-supply-chain approach, and looking at the value proposition for each legal entity within the supply chain

  • These factors all mean that one-sided analysis of intercompany transactions is unlikely to be sufficient, and that documentation needs to be adapted for each country

Interrelationship between tax authorities

  • Taxpayers should assume that information provided to one tax authority may be shared with other tax authorities

  • Some countries are participating in joint transfer pricing audits – which despite being a potentially alarming prospect, may in fact allow a consensus position to be agreed

  • Unilateral APAs are seen as a way to achieve an element of tax certainty. However, there is no guarantee that such APAs will be ‘respected’ by other tax authorities, and they may preclude access to MAP

Financing transactions

  • The staggering volumes of intercompany debt and the expected further guidance from the OECD on financing transactions mean taxpayers must pay increased attention to the quantum, pricing and other terms of loans and related financial transactions

  • Regulatory requirements, such as the Earning Stripping Rules in Malaysia, may in effect ‘trump’ transfer pricing considerations on specific transactions

  • The benchmarking of interest rates is clearly sensitive to country risks and currencies, as well as the credit ratings of participating entities. However, in practice many groups need to achieve a balance between granularity (a country-by-country / entity-by-entity approach) and practicality (putting legal entities and countries into ‘buckets’, such that similar financing transactions are priced on a common basis)

Managing the conflict between customs valuations and transfer pricing

  • In many corporates there is a high degree of fear of customs authorities within the APAC region – no doubt due to the enforcement background of customs officers, and the risk to the business by goods potentially being held at a border

  • Historically, customs officers in some countries have been unwilling to recognise transfer pricing considerations at all

  • Despite this, delegates at the conference reported some success in opening up communications with customs officers to explain how the group’s business processes work, including arrangements with, for example, limited risk distributors

  • Active management of the pricing of individual shipments may be needed in order to minimise the need for true ups and true downs at the end of a financial year

Management of tax risk and the TP lifecycle

  • Many corporates are still getting to grips with the requirement for ‘ex ante’ pricing of transactions, meaning that policies for the pricing of intercompany transactions need to be adopted and implemented prior to the start of each financial year

  • Significant penalties for late filing of documentation (especially in Australia) mean that a comprehensive tax calendar with dates for filings is an essential part of tax risk management

Putting the ‘contractual’ back into ‘contractual allocation of risk’

  • Intercompany agreements are a key element of achieving substance – 88% of respondents who voted on the relevant poll at TP Minds Asia 2019 were of the view that intercompany agreements are an important part of TP compliance

  • Functional and value chain analysis alone cannot fully evidence transactions or effectively allocate risk between related parties, such as required by the OECD TP Guidelines

  • As in other regions, tax authorities in the APAC region expect to see appropriate intercompany agreements as part of compliant transfer pricing documentation

  • In order for agreements to be effective in the contractual allocation of risk, they need to 1) contain legally binding provisions which deal with the relevant risks appropriately; and 2) be signed in advance, before the outcomes of the relevant risks are known to the related parties

As you may know, we’ve been offering free trials of our new ‘fast track’ service for creating intercompany agreements for standard intercompany transaction types – both for attendees at TP Minds Asia last week, and for other kind volunteers and ‘superheroes’.

If you haven’t participated in a trial but you’d like to know more about this new service, you can find the details here. Alternatively, just email us and we’ll be very happy to arrange a call with a member of our team.

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance