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The three pillars of robust intercompany transaction design. People talk about ‘substance over form’ in TP, but as a compliance strategy for corporates it doesn’t work. The topic of ‘substance over form’ only arises if there’s a mismatch between the two. For transfer pricing policies and transfer pricing analysis to be robust, all three pillars need to align, and need to be managed in real time. If any one of those pillars is missing or misaligned, the whole structure is put at risk, and the group’s investment in transfer pricing compliance may be entirely wasted. Join our free newsletter for practical insights on intercompany agreements, cross-border corporate structures and transaction readiness.

*Plot spoiler warning* - please scroll on if you have any upcoming training sessions with LCN on legal rights in IP / DEMPE This is the ‘key takeaways’ slide from our current IP / DEMPE training slides. My favorite points are: 4 – because some people still like to talk about ‘economic ownership’ of IP 6 – because TP is important, but it’s not the only game in town 8 – because otherwise DEMPE doesn’t work Join our free newsletter for practical insights on intercompany agreements, cross-border corporate structures and transaction readiness.

Legal is both an ‘input’ and an ‘output’ in the context of transfer pricing compliance. Legal is an ‘input’ in the sense that the legal and regulatory fact pattern needs to be understood, before any kind of TP analysis can happen. That’s because the legal and regulatory fact pattern can totally change the economic characteristics of related party transactions. The legal fact pattern includes the terms of intercompany agreements currently in place. Because if you’re changing TP policies and changing your agreements, this may constitute a business restructuring which would require some sort of compensation … and in any event requires explanation from a commercial rationale perspective. Legal is an ‘output’ in the sense that TP policies have no value unless they are actually implemented. And this includes legal implementation in the form of signed and dated intercompany agreements which align with the intended TP analysis … and which also meet the needs of the wider stakeholders involved, such as regulatory compliance, enforceability of IP, directors’ duties, WHT, indirect taxes and corporation tax deductibility of payments. Join our free newsletter for practical insights on intercompany agreements, cross-border corporate structures and transaction readiness.

Ex ante vs ex post: the most important practical distinction in transfer pricing? Some TP solutions only deal with the ‘ex post’ perspective – in other words, preparing compliant transfer pricing master files and local files after the event. ‘Facts’ and ‘conduct’ are treated as random events which need to be captured and then analysed. This is undeniably important, but it’s too late to change the fact pattern in the relevant financial year. And it’s no way to run a business. The only responsible way to manage a corporate group is to design intercompany transactions and establish appropriate intercompany price setting policies on an ex ante basis – and this include establishing intercompany agreements in advance, in a way that meets the needs of all the relevant stakeholders, not just TP. This is also how advisers can elevate themselves so that they are not just providing technical support as a commodity, but instead providing genuine strategic value. Join our free newsletter for practical insights on intercompany agreements, cross-border corporate structures and transaction readiness.

Before you build transfer pricing policies, you need a legal operating model. That’s the part most people skip. ‣ What entities exist? ‣ How do they contract? ‣ Where do legal rights in IP sit? ‣ What’s the regulatory environment? ‣ What’s the M&A history? Then: ‣ Map the transactions. ‣ Define the functions and relationships. ‣ Create price-setting policies? ‣ Put agreements in place. If the foundation is off, everything built on top of it is unstable. If you’re working from assumptions rather than a clear model, that’s typically where issues start.

Most transfer pricing teams still treat risk allocation as a paper exercise. Define it in the policy. Reflect it in the functional analysis. Done. That’s not how it works. For a risk position to hold, four things need to line up: ✔ Financial capacity ✔ Actual conduct ✔ Control of the risk ✔ Clear contractual implementation Miss one, and the whole position starts to fall apart. That’s where most problems show up. If you’re not sure all four align in your current scenarios, it’s worth taking a closer look.