This is not an axe

Sometimes appearances can be deceptive, and the differences between the right tool and the wrong tool may not be immediately apparent.

The tool pictured above is not an axe. It’s called a ‘maul’. A maul is thicker, blunter and heavier than a wood-chopping axe. It’s designed for splitting logs along the grain, to make firewood. By contrast, an axe is lighter, thinner and sharper, and is for chopping across the grain.

When carrying out healthcheck reviews of the legal implementation of transfer pricing policies, we often come across groups which have used third party agreements as the starting point for their intercompany agreements. From our perspective, this is a ‘red flag’, and often means that those agreements are not aligned with the relevant TP policies.

Although it is sometimes appropriate to use third party agreements and adapt them for intra-group transactions, in general they are not the right tool for the job. It is usually more appropriate to use intercompany agreements which have been specifically designed for the purpose.

Key differences include the following:

* the intended risk allocation is often completely different

* the intended allocation of rights in intellectual property is often completely different

* the pricing clauses in intercompany agreements are usually specific to the transfer pricing policies (e.g. target operating margin)

* in intercompany agreements, it is often important to identify the nature of payments (e.g. fees for services vs royalty vs payment for physical products)

* intercompany agreements often contain specific functionality, such as allocation keys and true up/true down mechanisms

* intercompany agreements should be kept as short as possible, and should be written in plain language as much as possible

* third party contracts are often much too long, and may contain procedural provisions which are not followed in an intra-group context, and therefore undermine the integrity of the arrangements.