BEPS in the Spotlight

BEPS ACTION ITEM 13: The Importance of Intercompany Agreements in a Post-BEPS Era

BEPS CONTRACT DISCLOSURE GUIDELINES:

Master file:

• A list and brief description of important service arrangements

• A list of important agreements amongidentifiedassociated enterprises related to intangibles, including cost contribution arrangements, principal research service agreements and license agreements

Local file:

• A comparison of the contractual allocation of functions and risks with the actual conduct of the parties

• Copies of all material intercompany agreements concluded by the local entity

Source: OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 (July 2017)1

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As countries enact legislation in accordance with the OECD’s Base Erosion and Profit-Shifting (BEPS) Action Plan, tax authorities around the world are taking a closer look at intercompany agreements for both content and consistency. A proactive approach to managing your intercompany agreements is essential for withstanding increased scrutiny.

MYTH: Reviewing intercompany agreements for content and consistency is a low priority for tax and legal departments.

REALITY: With the dawn of BEPS, increased scrutiny demands technology that can ensure full worldwide coverage of your intercompany transactions with an associated agreement that’s valid and in force.

Understanding intercompany agreementsIntercompany agreements are arrangements made between enterprises under common ownership or control that complete business transactions with each other. These legal written contracts cover the actual functions undertaken, risks borne and assets employed by the parties. Ultimately, intercompany agreements set forth the factual substance that will affect the determination of the arm’s length conditions and specific pricing.

Contracts should be clear, complete and consistentUnder the OECD’s BEPS guidance, multinational enterprises are required to produce a list of important intercompany agreements concerning cost contribution arrangements, R&D arrangements, and the license of intangibles in their master file, as well as copies of all material intercompany agreements in their local files. This will undoubtedly lead to an increase in scrutiny on intercompany contracts.

Particular attention should be paid to contractual terms between related parties, as the OECD has stated that written contracts in and of themselves should not drive economic outcome. So, contractual terms should be in alignment with the company transfer pricing policy, economic analysis and, more importantly, with the actual functions undertaken, risks borne and assets used by the parties.

Multinationals should be aware that tax authorities can challenge their intercompany contracts for two reasons: (1) If the characterization of an economically relevant transaction is inconsistent with the written contract, and (2) if an intercompany contract is inconsistent with how third parties would arrange their contractual relationship.

To illustrate the first reason, consider a simple example of a California wine producer that establishes a Chinese sales and marketing affiliate. The Chinese affiliate will initially incur upfront marketing expenses, which may prompt the Chinese SAT and the IRS to argue over who should rightfully bear the cost. Of course, if the wine becomes a hit product in China, both tax authorities will argue as to who owns the valuable marketing intangibles, as it will determine which tax authority can tax the commensurate profits. This type of issue has been prevalent among different tax authorities when the intercompany contracts are not clear and consistent and will attract even further scrutiny in the post-BEPS environment.

With respect to the second reason, the Australian Tax Office’s Tax Payer Alert TA 2016/4, which involves the intercompany leasing of certain property and assets, takes issue with transfer pricing approaches used by certain multinationals that “are not consistent with an arm’s length leasing arrangement and do not reflect the true economic contribution of the Australian operations.” It is imperative that a taxpayer’s intercompany contract discuss and apportion ownership and commercial risk in a way that is congruent with a leasing agreement between arm’s length parties.1

Bottom line: If a contract does not properly address risk, tax authorities may do it for you. Globally, rules regarding intercompany agreements vary widely. If your organization is in a reactive mode when it comes to intercompany agreements, it’s time to consider a technology solution for automating, managing and analyzing intercompany agreements worldwide.

To minimize challenges from global tax authorities, the first step must be to centralize and efficiently manage intercompany agreements so that they can be properly generated, updated and analyzed. Intelligent technology is now a prerequisite for compliance.

BENEFITS OF INTERCOMPANY AGREEMENT SOFTWARE:

A software solution for intercompany agreements can provide:

• Full control and centralized management

• Streamlined contract generation

• Modern collection of e-signatures

• Powerfulalertsandnotifications

• Integrationforlocalfile documentation

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How technology can helpA software solution can provide increased control, transparency and management of your intercompany agreements by generating agreements, gathering e-signatures and analyzing transaction coverage worldwide. Specifically, a software solution for intercompany agreements can:

Streamline contract generationYou can generate standard templates that can be leveraged for all transactions in all legal entities performing the same type of function and simplify the creation of an agreement based on approved and/or past language.

Centralize contracts You can manage your contracts in a centralized location (even for local entities). This offers advantages over a traditional document management system (e.g., basic document collaboration software or a folder on a hard drive) as it’s easier and more intuitive to review, organize and manage documents.

Modernize collection of e-signaturesA software solution makes it easy to gather signatures physically or electronically with a consistent process that speeds up the signing process by providing a clear explanation each time.

Monitor transaction coverageYou can generate reports to indicate all transactions that should be subject to an intercompany agreement and understand the level of coverage. You can also easily search agreements between certain entities, and sort or filter the full list of agreements in ways that make sense to you.

Receive alerts and notificationsA software solution also increases control and transparency by providing alerts and notifications when new transactions appear with no proper support — you can initiate the new contract and get it ready for signature with just a few clicks. With proactive notification, items are surfaced that need attention, such as upcoming renewals, likely terminations, unusual terms, agreements that were completed but never signed and transactions without agreements.

Leverage data and integration capabilitiesWith solutions that integrate with transfer pricing software, you can monitor new transactions and decide if new agreements are needed. By leveraging data instead of free-form entries, you gain consistency, searchability and time savings.

Enable audit-readinessIntercompany agreements may be requested during an audit — and not having them under control exposes a weak process for which your company could incur penalties. By using a software solution to manage and organize your intercompany agreements, you can ensure they are complete, consistent and accessible upon audit.

Content and consistency are keyIn a post-BEPS era, the content and consistency of intercompany agreements is necessary for compliance. If one thing is certain, it’s that more and more countries will adopt legislation in accordance with BEPS guidance, prompting tax authorities around the world to take a closer look at these contracts. The best choice for multinational enterprises is to take a proactive approach in staying ahead of inquiries and audit by implementing a software solution that can automate, manage and analyze intercompany agreements worldwide.

1http://www.oecd-ilibrary.org/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-2017_tpg-2017-en

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