Intercompany Agreement Distribution
Multinational companies may try to adapt agreements with third parties to intergroup situations, which is a mistake. “It can`t work,” Sutton says. “These types of agreements include elements such as notifications and change control procedures. But these simply do not work and are not relevant in an intergroup context. “An overview of our current range of business services for multinational corporations can be found here. Similarly, he says, these types of agreements generally do not have the type of terminology and risk allocation mentioned in relevant master data and other TP policies. The common result? A “total mismatch” between the transfer pricing policies of corporate tax teams they believe they have and what legal teams actually produce. How does this translate into the terms of the group agreement that must exist between the customer (as a supplier) and the distributor of the group company? Below is a non-exhaustive list of considerations regarding the legal provisions that may be included in a limited risk allocation agreement to reflect the sharing of risks and rewards between the parties. As in any intra-group relationship, the legal structure of the agreement should go hand in hand with tax and transfer pricing analysis (including functional analysis, comparability, VAT and customs duties). However, there are basic requirements that must be included in every intercompany contract: as regards the content of inter-company agreements, we stress three essential principles: it is important to ensure that inter-company agreements correspond to reality, comply with transfer pricing documentation and comply with market standards. Business-to-business agreements (ICAs) are an important part of transfer pricing compliance – they are part of local file requirements.
This is a good reason to have them on hand. Here`s another: Contracts that document different transactions, typically a sale or transfer of goods and services between two related parties, can be crucial in defending intergroup business practices in transfer pricing audits. However, since ICAs only show their value in difficult times, multinationals often create them and then archive them and forget everything about them. Intercompany agreements are fundamentally different from agreements with third parties (also known as commercial contracts). A business-to-business agreement is signed by two companies that are part of the same group. It can be assumed that they have the same goal: to increase the final result of the group. They have the freedom to organize the transaction as they see fit, and a dispute is unlikely to arise. At first glance, the business-to-business agreement is a formality. A multinational would wisely be advised to initiate a central policy for the preparation of ACIs. Without a holistic approach, Sutton says, you can create cottage industries.
“In other words, taxes produce agreements for their own purposes. Maybe the IP protection team produces their own agreements, VAT, etc. “It`s not just about creating something to control things, but also about creating something that really meets the needs of all the relevant stakeholders in the group. In practice, companies often neglect inter-company contractual obligations. And even when intra-group agreements are concluded, they are often poorly formulated, outdated and do not reflect the economic reality of the controlled transactions. The absence of group (quality) agreements can pose a risk for a variety of reasons. These are the three most important: when drafting group agreements, multinational companies must clearly describe how risks are distributed within the group, or the tax administration will examine the circumstances and facts as it sees them and deduce the position without reference to contracts. “That`s probably the biggest risk,” says Bladd-Symms. “In some jurisdictions, corporate groups are also fined simply for failing to submit the signed ICA when asked to do so.” In the case of an intra-group distribution agreement, the cost of the delivered goods may continue to be the main payment mechanism. However, there is usually a price adjustment clause that allows the distributor to make a reasonable fixed or minimum operating profit that is consistent with the Group`s transfer pricing compliance strategy. The first basic rule regarding intercompany agreements is to ensure that they accurately represent the way the group does business. To be ready for tax audit, a multinational must have an accurate, short and gentle ICA.
“If an agreement doesn`t match the way the group actually works in practice, it won`t have much weight and won`t be useful,” Sutton says. A model distribution agreement is included in LCN Legal`s series of model intercompany agreements for transfer pricing compliance. Email us at info@lcnlegal.com for information on pricing the model agreements and how to cover them. Transfer pricing agreements between affiliates must be formalized in intra-group agreements to make them legally binding, comply with transfer pricing laws, and provide an appropriate line of defense against challenges from tax authorities. If you don`t, your business runs serious and unnecessary risks. One day, the tax authorities knock on the door to inquire about transfer pricing rules and how they are documented. Pjotr Plastic informs them that there is documentation on transfer pricing, but that there is no group agreement proving that all affiliates have accepted transfer pricing agreements. The tax authorities are not convinced 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. In traditional distribution agreements, the primary pricing mechanism refers to the price of the goods delivered and the amount of the discount offered in relation to list prices. In addition, the distributor may be required to pay a one-time or annual fee for the privilege of negotiating as a distributor, similar to a franchise fee. 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. An intra-group agreement (also known as an “intra-group agreement” or “transfer pricing agreement”) is a contract (signed) between two or more affiliates. Such a contract governs the terms (T&C) of controlled transactions, such as. B the supply of goods or services from an affiliate to another affiliate. As with all intra-group agreements, a written inter-company agreement is essential from a corporate governance perspective.
In the absence of such an agreement, the directors or officers of the parties (in particular the distributor) do not clearly focus on determining whether it is an agreement that they can properly approve. Intercompany agreements may cover various controlled transactions. The following example illustrates what can happen without transfer pricing agreements: The content of intercompany agreements depends largely on the type of transaction being controlled and the jurisdictions in which the controlled transactions take place. Complex controlled transactions, such as intellectual property licensing, require detailed contracts. Contracts for simple controlled transactions, such as . B the provision of administrative services, can remain simple. An agreement must not only be consistent with actual business operations, but must also reflect your transfer pricing policy. A multinational must ensure that contracts are consistent with the group`s transfer pricing policy with regard to the allocation of risks and functions and with the other legal needs of the group. This includes asset protection, intellectual property protection and legal governance of the entire client structure. How can you ensure that group agreements ensure the protection of multinational companies in the event of an audit? To find out, we brought in two experts in intra-group agreements: Paul Sutton, co-founder of london-based law firm LCN Legal, and Leiza Bladd-Symms, associate director of LCN, are masters at creating intercompany agreements – in fact, Sutton, a corporate lawyer for over 25 years, concluded “Intercompany Agreements for Transfer Pricing Compliance – A Practical Guide” (2019, Law Brief Publishing, Minehead, Somerset, United Kingdom). Learn how to make sure these contracts work to your advantage. 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. If you need transfer pricing-compliant intercompany agreements for your controlled transactions, we have something for you. A third-party contract, on the other hand, is the result of negotiations on the GTC by two independent companies that protect their own interests. Usually, such an agreement is carefully drafted and reviewed before being accepted by both companies. It is unlikely that either party will be able to unilaterally dictate the terms and conditions of the agreement. Would you like to know more about business-to-business agreements? Listen to our podcast discussion about The Fiona Show: Episode 13: Intercompany Agreements and what you need to know now. .