In this context, companies should review, amend and, in some cases, reformulate their business-to-business arrangements in accordance with the revised OECD Transfer Pricing Guidelines and the content underlying their transfer pricing agreements. In the absence of an intra-group agreement, the starting point for functional analysis is the behaviour of the parties (i.e. the substance itself), which may lead tax authorities to form their own opinion on the functions, risks and expected results and on how the independent parties would behave. Well-formulated group agreements can determine which entity has the right to make these important risk management decisions. It is common for third parties to enter into legal agreements that set out the terms that govern a particular agreement/transaction. It would be very unusual for a company to enter into a significant agreement/transaction with a third party without a fully signed written legal agreement that allows each party to legally enforce the promises made at the time of closing the agreement/transaction. The absence of an intra-group agreement (or an ineffective/incomplete agreement) makes it difficult to apply step 2 of the recommended risk analysis procedure. This may raise questions as to whether transfer pricing policy has been carefully developed and implemented, taking into account the relevant guidelines. The preparation and implementation of an intra-group arrangement is a good practice for developing a transfer pricing policy in line with the OECD Transfer Pricing Guidelines. The OECD Action 13 guidelines require that a position be taken on the terms of each transaction. The OECD local file requires: (1) a description of the terms of the transaction; and (2) the results of the six-step process analysis for the precise definition of risk management, control and financing; and (3) copies of group agreements. Therefore, for the purposes of compliance with local Action 13 files, a full contract is recommended. They also have intercompany agreements in line with their typical external business agreements, which helps align agreements with the company and provides additional convenience that intercompany transactions are on market terms.
“We have had a very comprehensive review of the intercompany agreement for some time, which is mainly due to what has to do with BEPS issues.” Manuel went on to say that “the tax jurisdictions with which they have recurring audits are already very demanding. In almost all cases, we are the first to be invited to receive transfer pricing and business-to-business agreement documents at the beginning of the audit. For reasons of efficiency, the headquarters of multinational corporations (MNEs) often offer subsidiaries a variety of business-to-business support activities. Typically, these services fall into one of the broad categories of support, including human resources, finance, information technology, legal advice and marketing. With the increase in the volume of cross-border transactions and increased competition between different multinational companies, companies often centralize all intra-group services in a single low-cost location to create efficiency and avoid duplication of services. This trend has led to the creation of intra-group shared service centers. Even before the first observations under Action 13, tax authorities will start reviewing existing principles and requesting intra-group audit agreements. I spoke to Mike Manuel, Director of Transfer Pricing at Texas Instruments (TI), about his experience to date and the process of executing IT business-to-business agreements. He noted that TI has always been very diligent in respecting its business-to-business agreements. In many intercompany transactions, day-to-day risk mitigation is outsourced. A contract can prove which party controls the outsourced activity. The BEPS PROJECT has particularly focused on the regulation of intangible assets.
The above statements on the greater importance of the economic substance apply mutatis mutandis. With regard to intangible assets, it should be expressly pointed out that legal ownership alone is no longer sufficient to attribute the (residual) profits from the marketing of intangible assets to a company. As part of the audits, it is necessary to explain which company performs the economic functions (risks) with regard to development, upgrading, maintenance, protection and operation (marketing) and how important the respective functions are to the intangible asset.  Relevant classifications should be duly taken into account both in contract research agreements (strategic objectives, monitoring of milestones, remuneration for non-performance) and in licensing agreements (right to sub-licence, specifications and participation in commercialization activities, etc.). A fully signed group agreement (i.e. signed by both parties) can serve as an example of an official document approved by senior management to demonstrate that strong controls by the tax administration are in place. Evidence may be provided that the employees involved within an organization have gone through a process in which they have seriously reviewed and entered into an agreement on a particular intercompany agreement. This provides robust formalized control that helps ensure that relevant transfer pricing laws and guidelines are taken into account. .