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The No. 1 Question for Assessing How Well an MNE is Legally Implementing its Transfer Pricing

Intercompany Agreements

28 June 2021

One of the blessings of the 'new normal' for us, is that we’ve been able to sponsor and participate in a far wider range of TP conferences than would otherwise have been the case – over the last 12 months, this has included TP Minds Australia, Asia, West Coast, Canada and Americas, as well as ‘TP Minds International’ (aka London) earlier this month.

A perennial issue for discussion at TP conferences is of course how to survive TP audits with the minimum of pain. And one of our most important objectives at these conferences is to explain how direct and immediate the connection is between the commercial terms of intercompany agreements (ICAs), and the operation of the arm’s length principle for TP purposes – and therefore why ICAs are so fundamental for tax audit readiness.

We also get to speak to TP professionals representing a wide range of MNEs and advisers, and share experiences of different approaches to achieving tax audit ready ICAs which are aligned with their TP policies.

Here’s what I would regard as the key question to ask, in order to assess how well a multinational group is likely to be managing the legal implementation of its TP:

‘Do you have a central archive of ICAs?’

Of course, it’s quite possible for the ICAs in a central archive to be riddled with defects and inconsistencies. But the mere fact that a central archive exists at all, suggests that attention is being put there.

My guess is that not many of Coca-Cola’s advisers were asking this question in 2007-2009, the period covered by the US Tax Court’s decision in November 2020. And no doubt, the failure to ask this question contributed to the Court’s finding that Coca-Cola’s agreements were ‘outmoded’ and ‘incomplete’ – and fundamentally inconsistent with the group’s TP policies. (For more on this, see this article: Coca-Cola’s US $12 billion IP Mistake).

My prediction is that at the TP conferences of 2022, the discussion will have moved on. The need for a maintained central archive of ICAs will be regarded as obvious and foundational, in the same way that twice-daily tooth brushing is regarded as basic dental care.

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Article by
Paul Sutton
LCN Legal Co-Founder

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