Absolutely! The absence of intercompany agreements is considered a red flag and a sign that the transfer pricing is not in order. If you can show a clear, up-to-date, and compliant agreement in line with reality, this helps tremendously in defending your transfer pricing positions.
There are many important considerations, but we highlight three of them:
- Ensure that the agreement is in line with reality; if you invoice a cost+ mark-up of 4% while an agreement states 6%, this can raise eyebrows. This might seem obvious, but over time such discrepancies often happen within enterprises.
- Similar to the above; ensure that the agreement is consistent with TP documentation. If the conclusion of TP documentation is that a royalty fee should be 5% of the annual net revenues while the agreement provides for a royalty fee of 15%, this will probably not be accepted by the tax authorities.
- Ensure that the agreement incorporate market standards: The starting position with transfer pricing is that associated enterprises should transact with each other as if they were third parties. Hence, you expect market standard terms and conditions in the agreement. For example, if third party lenders normally require a borrower to provide securities for the repayment of the loan, it wouldn’t make sense to leave that out in an agreement between associated enterprises.
There is not one set of requirements that applies to all transfer pricing agreements in all jurisdictions. Even the OECD does not provide specific guidance on what information must be included in transfer pricing agreements. This makes sense; they are providing guidance for countries around the world, with different legal systems and focus areas.
Moreover, there is tremendous freedom for private parties to design agreements (freedom of contract). Our agreements contain all the essential aspects such as parties, scope, controlled transaction and arm’s length remuneration and give clear instructions. Other than that, the agreements can be adjusted to suit your needs.
Transfer pricing documentation substantiates the right transfer pricing arrangements.However, it is not legally binding. Intercompany agreements help you to implement and formalize the transfer pricing arrangement in a legally binding contract between associated enterprises. Other than certainty within your business, this also creates evidence towards the tax authorities that the transfer pricing arrangements have been implemented and formalized correctly.
The agreement is designed to be valid in countries all around the world. It contains all the key elements for the contract to be valid (e.g., consideration, performance, terms, governing laws and jurisdiction, etc). As it is impossible for us to publish a template that covers all country specific particularities, we advise to check with your internal or external counsel if amendments are required. If needed we can review the agreement or create one for you for a fee..