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.
