Intercompany Agreements in the Examining Process for Transfer Pricing Cases

The image above shows an extract from the IRS Internal Revenue Manual, confirming the factors to be considered by the relevant IRS team when reviewing intercompany agreements, as part of the examining process in transfer pricing cases.

Elsewhere in the same manual, it is stated that:

“Generally, the contractual terms of a controlled transaction determine the controlled party that bears a particular risk. This allocation of risk specified or implied by the contractual terms should generally be respected if it conforms with the economic substance of the controlled transaction.”

This focus on contractual terms is not surprising: it is consistent with the approach set out in the OECD’s TP Guidelines. For many transaction types, risk allocation is a key factor in the pricing of intercompany transactions.

If a particular allocation of risk is implicit in a group’s TP policies but is not substantiated by the contractual arrangements, the discrepancy is likely to be picked up in a TP audit, in which case it may be difficult for the taxpayer to defend its position. The time and money spent by the group on transfer pricing advice and documentation may be wasted, and the group may be subject to substantial costs in terms of adverse tax assessments, fines, penalties and disputes.

Our ICA Healthcheck tool

To help multinational groups and their TP advisers avoid this situation, we have created a tool which allows them to review their agreements in a structured and systematic way.

The output is an easy-to-read, colour-coded report, which covers the four key areas of alignment between agreements and TP policies.

It highlights areas and issues which may require further attention, so that corrective action can be taken now – minimising the risk of TP challenges and adverse TP assessments in the future.

The tool is in ‘Beta testing’ stage. Please try it out – it’s free, and no registration is required. You can access it here.

If you have any suggestions as to how the tool can be improved, I will be delighted to hear from you.

You may remember that I talked about this ICA Healthcheck tool in my email three weeks ago, in which I also told you about a free webinar on document automation. That has now taken place, and you can access a recording here. I think you’ll find that it’s half an hour well spent.

Article by Paul Sutton

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