Although we publish detailed checklists for intercompany agreements, and to a great extent ‘the devil is in the detail’, sometimes it’s helpful to remind ourselves of the macro, helicopter view.
From this perspective, the 80 / 20 rule applies: 80% of the upside of getting intercompany agreements right (or the downside of getting them wrong) often comes from 20% of the content.
When it comes to aligning template intercompany agreements with TP policies for any given transaction type (or vice versa when it comes to after-the-event TP documentation), there are four key areas:
1. Functions: The who-does-what of the agreement (core duties of the parties and the nature of the services / goods / intangibles / finance provided) obviously needs to correspond with the TP policies and documentation.
2. Pricing: The pricing provisions and payment terms must clearly reflect the TP method applied. No TP adviser would want their client to be in the situation described by the US Tax Court’s in the Coca-Cola case: “Although [The Coca-Cola Co.] used the 10-50-50 method to compute royalties payable by the supply points, it never incorporated any aspect of that formula into its written supply point agreements.”
3. Risk: To the extent that the contractual allocation of risk is economically significant (e.g. inventory, product liability, credit, IP infringement risks), that allocation must be incorporated into the agreements in legally binding clauses. Otherwise the group’s TP policies have not been implemented, and any TP documentation suggesting otherwise lacks reasonable care and may even amount to deliberate concealment.
4. Ownership of intangibles: This includes pre-existing intangibles as well as intangibles created during the course of the relationship. Particular care should be taken with marketing intangibles, which may cover a number of different things from a legal perspective (local trade mark registrations, local goodwill, customer contracts, customer connections, user data, and so on). A high level view has no value unless it's clear.
As a reminder, we’re looking at the issue of alignment from two perspectives:
- The forward-looking perspective – which is that intercompany agreements need to be put in place as part of each group’s processes for setting prices and TP policies in advance
- The backward-looking perspective – which is that statements made in TP master files, local files and equivalent documentation need to be factually accurate in describing the actual transactions, including the legal status of the four areas mentioned above.
If you’d like to understand this in more detail, you can find our detailed checklists here.
Get practical advice & insights on the Legal Implementation of Transfer Pricing for Multinational Groups