As you probably know, the IRS released transfer pricing FAQs in April of this year in response to the perception that standards in the TP literature were declining and to explain the impact on the associated punitive rules. Given the discrepancies between intra-group agreements and TP policies that we have encountered, it is difficult to disagree with them on the need to raise standards. Let`s work together to solve this problem. Here`s what the IRS said in these FAQs about intercompany agreements in particular: 3. Duration and Termination – Check the proposed start date for the agreement and any termination dates or provisions to terminate the agreements for notification. Pay close attention to any attempt at a „backdate“ – click here for a separate article on the subject. Revision of the provisions relating to the termination of the deadlines of the agreements. Notice periods should strike an appropriate balance between the flexibility of the group to change the structure in the future and the consideration of economically justifiable agreements for all participating companies (see also point 10 below). In our course, we offer a more detailed description of these requirements. We reaffirm that the content of the Group`s agreement must be consistent with the three principles mentioned above. Regarding the content of group agreements, we highlight three key principles: A group agreement (also called „intra-group agreement“ or „transfer pricing agreement“) is a (signed) contract between two or more affiliates. Such a contract governs the terms (GTC) of controlled transactions, such as .B.
the supply of goods or services from one affiliate to another affiliate. 8. Applicable law and formal requirements – Verify that the agreement contains a clear choice of applicable law and that legal advice has been sought in all areas where there is uncertainty regarding formal requirements. 6. Vertical consistency – If the agreement is part of a supply chain of goods, services or licenses, verify that the draft contract conforms to the chain operations above and below the agreement. This may include the final delivery of goods, services or intellectual property licenses to customers. 5. Legal ownership of the intellectual property created in the performance of the contract – verify that this is clearly indicated and that the identity of the owner coincides with the objectives of the intellectual property of the group.
If you need transfer pricing-compliant intercompany agreements for your controlled transactions, we have something for you. If you think the checklist is useful, please let me know and please share it with anyone you think might find useful. 7. Horizontal consistency – If the pricing of the service provided under the agreement is to be aligned with other similar supplies or distinguished from other similar supplies, ensure that the terms of the agreement are reasonably similar or differentiated, where applicable. This applies in particular to internal comparative values. If you have any comments on how the checklist could be improved, I would be very grateful to hear from you, just email me at info@lcnlegal.com. Intercompany Service Contract („Agreement“), which entered into force on the date and between [Identification Parties], CONSIDERING that each of the above-mentioned companies is a member of a jointly owned group of insurers and that transfer pricing agreements between affiliated companies must be formalized in intercompany agreements in order to make them legally binding and to comply with transfer pricing laws, and ensure an appropriate line of defence against challenges from tax authorities. If you don`t, your business runs serious and unnecessary risks.
The creation of an inter-company agreement is best done with an interdisciplinary approach. Tax and finance professionals prepare transfer pricing documentation, but may not have the skills to prepare legal documentation. Similarly, lawyers are generally unaware of transfer pricing rules. Therefore, it is important to ensure that the right people and skills are on board. The checklist can be used whether you are entering into a new agreement or considering whether an existing intercompany agreement needs to be updated. The following example illustrates what can happen without transfer pricing agreements: Tax authorities are not satisfied that Pjotr Plastic complies with transfer pricing laws. It wishes to verify (i) that the allocation of risks, assets and functions on which transfer pricing agreements are based is consistent with the actual arrangements and (ii) whether the related entities have accepted the transfer pricing agreements. In the absence of intra-group agreements, Pjotr Plastic must now provide further evidence and convince the tax authorities that its transfer pricing position is indeed what is claimed – a potentially lengthy and costly discussion. This could have been avoided.
It is important to ensure that business-to-business arrangements are real, compatible with transfer pricing documentation and comply with market standards. However, there are basic requirements that must be included in each intercompany contract: on a separate note; Thank you to everyone who provided feedback and support regarding the group agreement checklist we published last week for the distribution or resale of goods (available here) – I really appreciate it. This checklist contains an excerpt from our free guide to entering into effective business-to-business transfer pricing agreements. To access the full guide, click here. In practice, companies often neglect inter-company contractual obligations. .