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Spooky Halloween facts for Transfer Pricing professionals

Group Reorganisations

Intercompany Agreements

20 October 2017

You don’t need us to tell you that risk of TP challenge by tax administrations is increasing globally. Or that the factual matrix – also known as “reality” – will often be the softest target for Transfer Pricing challenges.

But this fact may surprise and shock you: every multinational group already has a fully comprehensive set of intercompany agreements, which track all their intra-group supplies and related intercompany charges. This is not an aspiration, it is a reality, and it includes every single group you will come across. These agreements may not be written down, but they have already arisen by operation of law, based on a set of international conventions and laws developed over hundreds of years.

The intercompany agreements which already exist in your group are fully comprehensive in two senses: firstly, they cover every single supply of services and goods between group companies, and every intercompany loan and licence of intellectual property. Secondly, these ‘virtual agreements’ contain a definite answer to any question as regards the allocation of any risk you may care to ask. A judge could never say “I don’t know” to the question: does your Hong Kong procurement hub act as principal or agent? There is already a specific answer, which is contained in the rulebook of international conventions and laws.

The problem is, unless you have consciously created and implemented effective intercompany agreements in writing, you probably have no idea what your agreements say, and whether or not they contradict your local and global transfer pricing compliance strategy.

Not every tax administration may be routinely targeting this yet, but those girls and boys are smart Halloween cookies, and their primary job and focus is to increase tax intake. Given that everyone agrees and the OECD guidance states that the first step in any transfer pricing analysis is to ‘delineate the actual transaction’, we predict that it won’t be long before this is a standard question in transfer pricing challenge of any tax administration anywhere in the world: what current legal agreements are in place? A response of “none” would be untrue. A response of “we don’t know” would be an embarrassing starting point for such an important negotiation. To take a tennis analogy, you don’t want to begin the first game of the final set love-fifteen down.

As always, the only question about a situation that matters, is what do you do about it. Either you control the facts, or the facts control you.

Happy Halloween!

P.S. If you want to finally get your group’s intercompany agreements in shape, and you don’t want to waste time having to explain to lawyers what terms like CUP, TNMM and DEMPE analysis mean, call us on +44 20 3286 8868 or email us at info@lcnlegal.com. We will get the job done for you without unnecessary fuss, and without giving you hundreds of pages of legalese.

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance