Tuesday, February 5, 2019

9 Tips For Framing Intercompany Agreements for Transfer Pricing Deals

9 Tips For Framing Intercompany Agreements for Transfer Pricing Deals

Multinational Enterprises (MNEs) are routinely involved in framing intercompany agreements for transfer pricing transactions between their associated entities. These contracts define the legal conditions under which products or services are provided by one associate to another. They help in reducing the tax liability of the organization and are useful for regulatory compliance purposes. However, many corporations do not invest much thought in drafting these documents. This results in loopholes in the agreements which can lead to disputes with tax authorities and imposition of penalties. Enterprises must engage professional transfer pricing firms to prepare foolproof contracts. In this article, we are presenting some helpful suggestions which can be used to create effective intercompany agreements.

9 Tips For Framing Intercompany Agreements for Transfer Pricing Deals

1. Use Third-party Agreements As Reference Points

Companies can use third-party agreements as reference points for drafting intercompany agreements. These detailed documents will contain all possible information related to a transaction. Instead of creating a basic draft and then adding additional data according to the requirements of a deal, it will be better to use a comprehensive agreement and then deleting unnecessary clauses from it. This will help in creating a thorough agreement but without too specific conditions which can cause compliance failures. Do not blindly copy the terms of a third-party agreement and only use it as a benchmark to create the new contract.

2. Use Recitals To Explain Your Position

Recitals are not required to be a part of the legal contract but they can be used by taxpayers to explain their position. They help explain the purpose of an agreement and corporations can include the objective of their deal in a recital. This will clearly communicate the intention with which the two related parties entered into a contract. It will help eliminate scope for confusion and prevent potential disputes.

3. Do Not Use Ambiguous Language

A common mistake committed during the formulation of these documents is the use of ambiguous language. Businesses feel that using a vague tone keeps options open but forget that it also makes the content prone to multiple interpretations. There is no guarantee that a tax authority will draw the same inference from the text as the taxpayer. It will be, therefore, sensible to clearly state the intention of the pact in unambiguous terms throughout the whole document.

4. Clearly Mention An Initial Payment Amount Or Profit Margin

Another strategy that businesses use is not to mention a specific amount for the payment. They simply include a clause that the price for the transaction will be calculated according to the arm's-length pricing mechanism. This can draw a negative reaction from the authorities. It will be pertinent to specify an initial payment amount or the profit margin that will be used as compensation. If the company wants to keep its options open, it can insert a pricing adjustment clause which will dictate how and when adjustments to the payment can be made. 

5. Be Cautious While Drafting Agreements Involving Transfer Of IP Assets

The intercompany transfer pricing agreement for transactions involving Intellectual Property (IP) assets require extra caution and diligence. It is essential to know that the transferring entity does possess the legal right to do so. Moreover, in scenarios where more than one asset is being transferred, all elements must be mentioned separately in the agreement. It will be pertinent to use the expertise of IP rights professionals for drafting the document as they will possess an in-depth understanding of the ownership and tax issues of such transactions.

6. Ensure All Involved People Are Aware Of The Terms

The parent organization must ensure that all the staff members in both the entities that are involved in a transaction or can be affected by the terms of the arrangement are aware of the contract. In fact, the document must be provided to the key decision-makers in the operations, finance, IT, and legal departments. They must review the agreement and suggest any changes before it is finally approved by the organization. 

7. Hire A Local Expert To Understand Foreign Law Implications

Many such deals take place between associated enterprises located in different countries. The corporation must hire local legal experts to understand how the applicable regulations of the jurisdiction can affect an arrangement. For instance, a subsidiary must hire the top accounting firms in India there to know about relevant laws and the consequences of their application. This practice becomes all the more important if the relevant foreign regulation is chosen as the governing law for the agreement.

8. Follow All Administrative Conditions Included In The Document

All the administrative provisions which have been included in the agreement must be followed by the participants. Many related entities do not adhere to the terms which can lead to authorities charging them with non-compliance. It will be better if only those conditions are inserted into the document which are necessary and can be easily adhered to by the parties. 

9. Keep A Record Of All Drafts Of The Agreement

A common problem associated with the drafting of contracts between related parties is that they get careless about maintaining them. The parent organization must ensure that the agreement must be signed by both participants and stored in a safe location. Moreover, the various preceding drafts of the document must also be saved so that they can be used for reference in the future.


Framing extensive and error-free intercompany agreements for transfer pricing transactions is a best practice that not only helps in complying with important regulations but also improves the corporate governance standards of all the organization.


1 comment:

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