‘Tax audit-ready’ AND ‘regulatory audit-ready’ – managing intercompany agreements for regulated groups

We all know that intercompany agreements (aka ICAs) are not just about transfer pricing. They also need to meet the needs of other stakeholders, such as regulators.

Regulated groups (such as those in the financial services sector) face a very specific problem when it comes to ICAs: silo-based approaches to the form and content of agreements.

Unlike other sectors, in which the management of ICAs is often owned by the tax function, in regulated sectors it is usually compliance teams that take the lead. Which is understandable: where a regulated entity procures services or support from a related party, this may be regarded as a ‘material outsourcing arrangement’ by the local regulators, notwithstanding the fact that it’s intra-group.

This often means that the local regulator will expect to see equivalent contractual protections to those which would be provided by a third party outsourced provider. These issues trump all other considerations (including transfer pricing), since regulatory compliance is the mission-critical ‘ticket to play’.

One thing we often see in regulated groups is intercompany agreements which bear no relationship at all to the claimed TP policies – for example as regards scope of services, risk allocation, pricing and ownership of intangibles. And TP policies which bear no relationship to the group’s regulatory structure.

Clearly that’s not sustainable from a TP perspective. So the tax function needs to take the initiative in engaging with the problem. This means fully understanding the regulatory environment as a ‘legal anchor point’ which is essentially fixed, and also ensuring that the group’s ICAs contain the necessary TP functionality, over and above that required for regulatory compliance.

From a practical perspective, this usually requires streamlining and standardising agreements as much as possible – the more complicated a group’s portfolio of ICAs is, the harder it will be to keep up to date. (Or even just to create it correctly in the first place).

In order for the group’s ICAs to be ‘regulatory audit-ready’ and not just ‘tax audit-ready’, it may make sense to group ICAs by recipient of the relevant services / intangibles, as shown in the diagram below. In this way, a regulated entity which is a recipient of intra-group services can produce a single multilateral agreement covering all the intra-group supplies it receives, and demonstrate to its local regulator that it has appropriate protections in place.