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BEPS

BEPS puts intercompany agreements in the spotlight

Sam Cicogna  Vice President and Head of ONESOURCE Transfer Pricing

Sam Cicogna  Vice President and Head of ONESOURCE Transfer Pricing

Imagine a world where the general public not only cares about the tax function, but they have an idea of what tax professionals do.

In this theoretical world, certain areas of tax, such as transfer pricing, are big news and have a heavy focus from the business and investing community. News outlets would report on tax stories related to large multinationals, and people would actually discuss the impacts. Not long ago, this world was a fantasy; today, it is a reality.

The Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Action Plan has put certain areas of tax, such as transfer pricing, into the spotlight. And while John Q. Public may not fully understand the regulations, policies and nuances that the typical transfer-pricing professional does, they still have opinions on everything from Apple® to Starbucks® and back. In the transfer-pricing world, this project has brought about transparency, scrutiny and change.

And while there are multiple action items on the OECD BEPS plan related to transfer pricing, the clearest deliverables relate to Action 13 and the dreaded Country-by-Country Report (CbCR). However, while CbCR is part of Action 13, it’s not the entire focus. Action 13 lays out a new, three-layered framework of transfer-pricing documentation containing a Local File, Master File and CbCR. It also puts a bright spotlight on gaps that many multinational enterprises (MNEs) have in some of the other areas included in these reports and highlights their risk. One such inclusion relates to intercompany agreements, the contracts between related parties that outline the terms by which the entities do business with one another.

Intercompany agreements are becoming more important than they have ever been before. It is not a new requirement to have a formalized agreement between entities for intercompany transactions. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published in July 2010, outlines the need for contractual terms in line with the character in which the company does business. It also states that if a company does not have an intercompany contract (agreement), the contractual relationship of the parties must be “deduced from their conduct and the economic principles that generally govern relationships between independent enterprises.”

It sounds so simple, yet in practice it is anything but that. Imagine arm-wrestling with a country transfer-pricing auditor on issues when no contract exists or they don’t believe the contract is valid. They will obviously be arguing a different position than you. You can probably guess on which side of the fence each party will be and whom each argument will benefit.

Many MNEs have struggled over time to keep current on their intercompany contracts and to ensure they’re being properly adhered to. Volume of contracts, changing policies, key employee turnover and many other factors often make it a challenge to keep these agreements up to date. In the Controlled Transactions section of the final Action 13 report outlining required attachments for the Local File, there is a bullet requesting companies to include “copies of all material intercompany agreements concluded by the entity.” To include them with the Local File, they need to exist and be current/proper. Again, this seems very easy but in practice can be very difficult.

Even in advance of the first filings under Action 13, taxing authorities are starting to dig in on the existing principles and request the intercompany agreements on audit. I spoke with Mike Manuel, director of Transfer Pricing at Texas Instruments (TI), about his experience to date and TI’s process for handling intercompany agreements. He noted that TI has always been very diligent about keeping up to date with their intercompany agreements.

“We’ve had a very comprehensive intercompany agreement review going on for quite a while, predating anything related to the BEPS issues.” Manuel continued to say that “the tax jurisdictions with which they have recurring audits are pretty sophisticated already. In almost every case, the first thing we are asked for at the beginning of the audit is the transfer-pricing documentation and intercompany agreement.”

While TI has a great process in place, many multinational corporations (MNCs) need to define a more precise process and fill in the gaps. With all of the new requirements being thrown at MNCs in a short time period, it’s important that they spend time evaluating and preparing. For intercompany agreements, this would entail reviewing the agreements that they already have and ensuring that they align with the most current economic analysis and transfer-pricing policies. It also means making sure that the agreements are archived in an easily retrievable place. Finally, an organization will want to design processes addressing the creation of new agreements and annual review of existing agreements.

Manuel noted that TI does a yearly review with every entity to make sure they can incorporate changes into their transfer-pricing documentation and intercompany agreements. Their biggest challenge is staying on top of the business and ensuring that when they have a new transaction in an entity, that they have an intercompany contract as well. Good planning has helped.

As Manuel notes, “There’s no magic bullet; it’s a lot of hard work and due diligence.”

They also have intercompany agreements in line with their typical external commercial contracts, which help to align the agreements to the business and provide additional comfort that the intercompany transactions are at arm’s length.

“It’s ingrained in our DNA,” says Manuel.

With the proper planning, processes and, of course, software tools, an organization can turn a hectic, time-consuming endeavor full of risk into a controlled, streamlined and issue-free check of the box.


How does your global tax compliance look in the bright light of BEPS?

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