Intercompany Agreements for Transfer Pricing Compliance · Sales of product (For illustration purposes, assume both sell the same volume of the same product on the same market at

Intercompany Agreements for Transfer Pricing Compliance

How to create and maintain tax-audit ready ICAs

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© LCN Legal Limited 2019

Presenters Agenda

Paul SuttonCo-Founder | LCN Legal

Ivan Hanna

Director | LCN Legal

Leiza Bladd-Symms

Associate Director | LCN Legal

[email protected]

[email protected]

[email protected]

Part 1: ICA basics

Part 2: How we help

Part 3: FAQs

Free resources and additional information

Legal implementation of TP throughIntercompany Agreements (ICAs)


LCN Legal: Who we are

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Our publications and speaking engagements on ICAs include:Tax JournalTax Adviser magazineTaxation magazineTP WeekToday’s General CounselInCompliance magazineBloombergAccountancy AgeThomson Reuters OneSource


Why we give training on ICAs

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The Basics

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• What are ICAs• ICAs in the OECD TP Guidelines• Example: effect of buy-back clause

on price• Backdating• 5 common misconceptions about

ICAs• Typical ICA mistakes


What are ICAs?

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Typical examples:• Central support services / head

office services• Strategic management services• Marketing services• R&D services• Intellectual property licences• Software licences• Limited risk distributors• Shared client account services• Toll manufacturing• Procurement services• Intercompany loan agreements

Intercompany agreements are legal agreements which define the terms on which services, products and financial

support are provided between associated enterprises.


ICAs in the OECD TP Guidelines

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What the OECD says:

“Importantly, ex ante contractual assumption of risk should provide clear evidence of a commitment to assume risk prior to the materialisation of risk outcomes. Such evidence is a very important part of the tax administration’s transfer pricing analysis of risks in commercial or financial relations, since, in practice, an audit performed by the tax administration may occur years after the making of such up-front decisions by the associated enterprises and when outcomes are known.”

OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2017 edition, p 63 (underlining added)

BEPS documentation:• Master file must contain “a list of

important agreements related to intangibles”

• Local files must contain “copies of all material intercompany agreements”

What this means in practice:• Defective ICAs are an obvious

point of focus for tax authorities


Example – effect of ‘buy-back’ clause on price

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Source: OECD Transfer Pricing Guidelines 2017, p 427 (Highlighting added)Note: The example is provided for illustration only

Case 1:The distributor does not assume the

risk of obsolescence of products because it benefits from a “buy-back” clause whereby all unsold inventory

is purchased back by the manufacturer.

Case 2The distributor assumes the risk of

obsolescence of products. It does not benefit from “buy-back” clause in its

contractual relationship with with manufacturer.

Sales of product (For illustration purposes, assume both sell the same volume of the same product on the same market at the same price)

1000 1000

Purchase price from manufacturer taking account of the obsolescence risk in accordance with the functional analysis

700 640

Gross margin 300 (30%) 360 (36%)

Loss on obsolete inventory 0 50

Other expenses 250 250

Net profit margin 50 (5%) 60 (6%)


Timing and backdating of ICAs

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“The purported assumption of risk by associated enterprises when risk outcomes are certain is by definition not an assumption of risk, since there is no longer any risk.”

OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2017 edition, p 63 (underlining added)


5 common misconceptions about ICAs

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Misconception Reality

1. Functional analysis is more important than ICAs.

Functional analysis alone cannot delineate a transaction.Operational reality needs to match both the functional analysis and the ICAs.

2. Pricing clauses in ICAs should be left vague.

There can be no contractual allocation of risk without a legally binding contract.Contracts require legal certainty.

3. ICAs should be implemented after the year end, when filing TP documentation.

Contractual allocation of risk cannot be backdated.ICAs should be implemented in advance.

4. ICAs are artificial, since they are between group entities.

ICAs can make a significant difference to the position of creditors in corporate insolvency.ICAs enable directors to comply with their legal duties regarding the legal entities of which they are directors.

5. ICAs are ‘too difficult’ to implement and maintain.

Practical tools, resources and support are available.


Typical ICA mistakes

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Typical ICA mistakes:

• Scope of supplies don’t match TP policy• Pricing provisions don’t match TP policy• Ineffective ‘agreement to agree’ pricing clauses• Limited risk distributors which are not limited

risk• Inappropriate limitation of liability clauses• Inappropriate termination notice periods• Inappropriate contractual procedures (e.g.

reporting, treatment of changes)• Overly long contracts• Intellectual property flowing in the wrong

direction• ICAs drafted in isolation (e.g. supply of goods,

licensing of IP)• Fraudulent backdating

Sample LCN Legal ‘Traffic Light’ review

How we help

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• Our 6-step process for managing ICAs

• Legal support options• Training and templates• ‘Fast track’ ICA drafting service


Our 6-step process for managing ICAs

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Legal support options from LCN Legal

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1. ‘Traffic Light’ review of existing ICAsPrice GBP 4,750 per sample ICA reviewed. Discounts offered for multiple reviews.

2. Design of ICAs, tailored for each transaction typePrices from GBP 4,950 for the first ICA andGBP 3,960 for each additional ICA.

3. Fast-track ICA drafting servicePrices from GBP 1,750 per agreement.

4. Full-service design, implementation and maintenance of ICAsIncludes full project management and support.

5. Corporate structuring projectsIncludes supply chain restructuring and corporate simplification projects.

6. Virtual legal director serviceOngoing, dedicated support from senior lawyers with international experience.

LCN Legal does not advise on tax, transfer pricing, comparables

analysis or benchmarking


Training and templates

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1. LCN Legal Online Course in Intercompany Agreements for Transfer Pricing Compliance

Price GBP 1,950 for first participant, and GBP 950 for additional participants from the same organisation

2. Bespoke training sessionsPrices from GBP 1,750 for webinars

3. Toolkit of template ICAsPrice GBP 3,850


NEW: LCN Legal ‘Fast Track’ ICA Drafting Service

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A document automation platform which generates agreements for standard transaction types including:• Services charged on a cost plus basis such as:

• Central support services (including finance and accounting services, tax and legal services, HR management services, IT support services, etc.)

• Procurement services• Logistics services• Marketing services• R&D services

• Appointment of limited risk distributors / sales entities remunerated on a TNMM basis

• Lead contractor / support services arrangement• Intellectual property licence / royalty agreement• Intercompany loans (term loan / revolving credit facility / overdraft

facility)

Additional transaction types are under development.


Agreement functionality

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Agreements created include the following functionality:

• Single and multiple service recipients• Bilateral and multilateral agreement formats• Retroactively effective agreements (to the extent possible)• Ownership of IP in work products• Allocating control over delivery of services• Multiple cost keys• Payment terms and interim payments• Post year-end true ups• Options for treatment of default interest

Automated translations (currently Chinese for business support services)


LCN Legal ‘Fast Track’ ICA Drafting Service: how it works

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1. Complete a straight-forward online questionnaire – typically takes 5 to 10 minutes

2. A template will be generated, based on the information you have provided

2 simple steps:

How the online questionnaire works


FAQs

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• Which law should apply?• How long should ICAs be?• Should we use bilateral or

multilateral ICAs?• How should we deal with

branches?• How should we deal with

translations?• How should we document profit

splits / operating margin allocation?

• Can we use electronic signatures?• Why do we need briefing notes for

subsidiary boards / signatories?


Which law should apply to ICAs?

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Free resources and additional information

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Briefing on how to create effective Intercompany Agreements for Transfer PricingA practical briefing for finance, tax, transfer pricing or Legal professionals who need to put in place appropriate intercompany agreements for multinational groups, to avoid unnecessary adjustments, fines and penalties.For your free copy, email us at [email protected]

Various other free resources are available at www.lcnlegal.com

Details of our ‘fast track’ document automation platformhttps://lcnlegal.com/fast-track-ica-drafting-service/

Any other questions?Email us at [email protected]

http://lcnlegal.com

http://www.lcnlegal.com/

https://lcnlegal.com/fast-track-ica-drafting-service/

http://lcnlegal.com

Documents

Intercompany Agreements for Transfer Pricing Compliance · Sales of product (For illustration purposes, assume both sell the same volume of the same product on the same market at