In addition to thinking about transfer pricing, direct and indirect tax effects should also be carefully considered in the development of intercompany agreements. Where possible, the intercompany agreement should have a language to adequately describe the expected tax treatment of contracting parties, such as withholding tax and indirect tax obligations. By a clear and consistent written agreement, the subject provides evidence that the transfer pricing agreements have been unquestionably implemented and contributes to the compliance of the underlying transaction and its commercial terms with the principle of arm length. In the case of transfer pricing controls, tax authorities generally require transfer pricing documentation, including all relevant intercompany agreements, as a starting point. This is expected and, therefore, non-compliance with intercompany agreements is considered to be immediate non-compliance and increases the likelihood of further investigations by the tax authorities. Through a thorough intercompany agreement management process, taxpayers can effectively reduce the risks associated with tax controls, with relatively little time and cost. The importance of periodic review cannot be underestimated. The subject should check regularly whether the intercompany agreements are up to date and reflect the real situation. The following example illustrates what can happen without transfer pricing agreements: of course, updating transfer pricing policy is not just about checking economic analysis and comparable analyses and replacing existing TP guideline documents. These include taking into account the current legal structure of the group and its intercompany agreements, the design of an appropriate future structure (whether it is a “new normal”) and how the transition from the current situation to the future state can be done in a manner consistent with the principle of arm length and with the legal obligations of the directors.
Given the expected increase in regulatory controls and tax litigation, it`s time to review your Intercompany agreements and implement a coherent and forward-looking Intercompany agreement management process. In its transfer pricing guidelines, the OECD notes that written agreements alone should not fuel the economic outcome – the actual behaviour of the parties in the covered transaction should do so. Many legal systems have also changed their transfer pricing laws in recent years and require that the legal form of intercompany transactions be reviewed on the basis of their actual substance.