What does the IRS say about the role of intercompany agreements in TP audits?

The US Department of Treasury recently (June 2018) updated its ‘Transfer Pricing Examination Process’, which is a guide to best practices and processes to assist with the planning, execution and resolution of transfer pricing examinations carried out by the IRS.

The guidance divides the work of a TP audit into three phases:

  • Phase I: Planning (determining the scope of the audit)
  • Phase II: Execution (including determining the facts, applying the law to those facts, and understanding the tax implications)
  • Phase III: Resolution (with the goal of reaching agreement, if possible, on the tax treatment of each issue examined)

As you would expect, the guidance document highlights the need to review relevant intercompany agreements, as part of Phase II. This involves not just a cursory review of terms, but an assessment of the allocation of contractual risks, with the benefit of legal advice.

Here’s an extract from page 21 of the guide:

“The issue team should perform a review and analysis of relevant intercompany agreements:

• Collaborate with LB&I [Large Business & International] Division Counsel to understand legal terms and content of intercompany agreements:

  • Determine relevant parties
  • Identify important terms of the agreement
  • Identify compensation and forms of payments
  • Assess the contractual risks assigned to the controlled parties
  • Determine if the conduct of the parties is consistent with the written agreements
  • Identify any discrete legal issues”

You can download the full guidance document here.

In case you haven’t already reserve your place: on 5th September we’ll be running a live webinar on Intercompany Agreements for TP compliance. It’s for Transfer Pricing professionals, international tax advisers, CFOs, in-house legal counsel, and anyone else who is responsible for ensuring that multinational groups have an effective TP compliance strategy which is rooted in legal substance.

The focus will be on how multinational groups can establish and maintain an appropriate system of Intercompany Agreements, based on our experience of working with clients in places such as Australia, China, Germany and the USA. The topics we’ll cover will include:

  • What the OECD’s Transfer Pricing Guidelines say about Intercompany Agreements
  • Common mistakes and issues
  • Why intercompany agreements are not just about Transfer Pricing
  • Examples of key terms of Intercompany Agreements
  • Practical do’s and don’t’s

The webinar is free, but spaces are allocated on a first-come-first-served basis.

To reserve your place, click here.