LCN Legal

Join Us for a Private Briefing on Managing TP Risks and TP Controversy September 25, 2024 | NYC This private event will be hosted by Birch Risk Advisors in New York's Graybar Building, which has been described as an "impressive beauty of steel bulk." The interactive panel discussion is designed to give in-house tax and finance professionals, as well as transfer pricing and international tax advisers, a practical briefing on how to manage transfer pricing risks and transfer pricing controversy in the current litigation environment. During the session I'll be interviewing Nathan Wacker, a tax litigation partner at Skadden, Arps, Slate, Meagher & Flom LLP, as well as Sheldon Elefant and David Danesh, both partners at Birch Risk Advisors and experts in tax insurance. In addition, I will be explaining the practicalities of creating and maintaining an effective system of intercompany agreements, which is foundational both for reducing the risks of TP controversy, and for putting in place tax insurance for TP risks. The event will begin at 5.30 pm on Wednesday, 25 September 2024, and is designed to coincide with the ITR Global Transfer Pricing Forum USA which take place in New York on the following day, and which LCN is sponsoring. Attendees will learn: * How the IRS’s approach to TP audits and TP litigation is evolving * Do’s and don’ts for taxpayers when faced with potential TP controversy * How tax insurance can be used to achieve clarity on TP risks * How the tax insurance underwriting process works * The critical role of intercompany agreements in defense files and transaction-readiness * Practical tips for taxpayers when managing their portfolios of intercompany agreements. If you would like an invitation to this event, please message me directly privately. Capacity at the venue is limited to 35 people, so if you are interested please do let me know as soon as possible Photo credit: Zach Miles via Unsplash #TransferPricing #LegalSubstance #IntercompanyAgreements

Anatomy of a Transactional Profit Split Agreement: Key legal considerations. The slide below attempts to give an overview of the four key areas of functionality of an intercompany agreement to implement a transactional profit split. To be precise, this refers to a split of 'actual profits' rather than 'anticipated profits', as described in the OECD TPG. It's worth mentioning a few basic points: 1. You need to understand the overall 'matrix' of intercompany transactions / agreements before you set pen to paper on the agreement. This is particularly important on profit split arrangements, because this factors into the distinction between 'unique and valuable contributions' and other transactions, and into the definition / calculation of the 'residual' profits to be split. 2. The choice of the profit split method usually implies that relevant risks are assumed jointly, which depends in part on the contractual terms. So the contract design goes hand-in-hand with the choice of how the transfer pricing method is applied. 3. Getting clear on revenue streams is critical, including in particular which entities receive third party revenue (directly or indirectly), and which don't. Without clarity on this, you can't understand / design / document / characterise the adjusting payments. 4. Equally important is getting clarity on where IP rights sit (i.e. with which entity) - both for pre-existing IP and for IP created during the course of the profit split arrangement. If you get this wrong, (a) the group may not be able to enforce its IP effectively, and (b) you may have an unwelcome surprise when it comes to transitioning to a different arrangement (e.g. a CSA in place of a profit split). 5. Tax authorities always have the benefit of hindsight, whereas taxpayers are expected to document arrangements in advance. That's just how things are. The easiest, quickest, cheapest and most effective approach is to do your best to design, implement and operate an arrangement in advance, which has substance from a TP, legal and governance perspective, and which meets the needs of all the relevant stakeholders.

The UK case of JPMorgan Chase Bank NA v HMRC [2023] TC 8957 is an instructive example of the role of intercompany agreements in the VAT treatment of intra-group supplies. The case illustrates the risks of intercompany agreements ‘produced primarily with transfer pricing and regulatory considerations in mind’, and without full appreciation of other issues at stake. It is also notable for the lack of sympathy showed by the Tribunal towards a multinational group which had “extensive resources available for the task” of designing and implementing appropriate intercompany agreements, and which should not be permitted to “go behind” the terms of its own agreements. (An attitude strikingly similar to that of the US Tax Court in the transfer pricing case of Coca-Cola). The key facts of the case can be summarised as follows: * JPMorgan Chase Bank NA (CBNA) provided ‘support services’ and ‘business delivery services’ to its affiliate JPMorgan Securities Plc (SPLC). * The ‘support services’ were administrative in nature, including legal, HR, compliance and finance. The ‘business delivery services’ involved the provision of a trading infrastructure, including technology, operations and market risk, without which SPLC could not trade. * The provision of the ‘support services’ and the ‘business delivery services’ was governed by a Global Master Services Agreement (GMSA) put in place in 2006, and updated in 2010, 2015 and 2019. The fees for the relevant services were billed in a lump sum using the group billing software. It was not possible to identify exempt and non-exempt services or even individual services as part of the relevant GMSAs. * The supplier and the recipient of the relevant services were part of the same UK VAT group, due to CBNA having a UK branch. The relevant supplies would therefore ordinarily be exempt from UK VAT. * However, as CBNA bought in services from overseas in order to enable it to make those intra-group supplies, HMRC contended that the whole of the intra-group supplies were taxable. The First Tier Tribunal (FTT) decided in favour of HMRC. The FTT found that: * The relevant intercompany agreements (i.e. the GMSAs) reflected the economic reality at the time of the arrangements. * All of the services were required by SPLC in order for it to trade, and were not available separately. No distinction could be drawn between the support services and the business delivery services. It was not possible to identify a ‘principal’ element of the supply. * The wording of the agreements indicated one single supply of all the services provided. * The support services and the business services supplies were one single supply not qualifying as exempt from VAT. #TransferPricing #LegalSubstance #IntercompanyAgreements

Humble brag alert: Please scroll on if you don’t like humble braggers or talking about responsiveness of professional service providers. ******************** Back in the mists of time, the amazing Ian Barron was very generously mentoring us at LCN in how we should best support tax and transfer pricing professionals who serve large corporates. One aspect of that was what our ‘USPs’ should be. One USP he suggested was that we should be ‘highly responsive’, as a differentiator from other service providers. As recovering M&A lawyers, this was already in our DNA: A slow and unresponsive M&A lawyer is about as much use as a chocolate spanner. A few years ago, we decided to formalise this into specific internal service standards, such as for responding to messages from clients and fellow professionals. I’m not going to share what those standards are, in terms of numbers and deadlines. If you work with us, hopefully you’ll already have a good idea. There can however be downsides to having high standards (or any standards) for responsiveness. One being that you may fail to achieve them. Another being that there can be a conflict between responsiveness and efficiency: you don’t want to be chasing messages at the expense of actually getting stuff done. So I'm really interested to hear from you (whether you’re in house or in private practice): ? Do you have defined service standards for responsiveness? ? How have they evolved over time? ? How do you monitor them? ? Do you refer to them in your proposals to prospective clients, or in your commitments to internal clients? (We don’t currently, but we probably should do.)

Some action > no action Bad system > good person This post is inspired by a conversation with Johann Muller yesterday – he's an excellent port of call for anyone who wants a practical perspective on international tax compliance. The two propositions above apply to anything and everything, assuming the underlying intention is to ‘do the right thing’. Which, in the area of intercompany agreements and the legal implementation of TP, means an intention to protect the interests of the MNE group. If an MNE group has taken some action, and has some intercompany agreements in place, it’s generally better than having no agreements. At least you’ve recorded the fact that a transaction exists. And the current agreements are a reference point which can be improved on. Similarly, having a poor system for reviewing, updating and archiving agreements is better than having no system – and relying on a ‘good person’ to work out what they should be doing. The starting point is always where you are right now. The questions below are intended as a starting point for in-house tax and TP managers to assess where they are as regards their intercompany agreements. What questions would you add? **************************** Self-assessment questions about intercompany agreements (ICAs) for transfer pricing and legal compliance: Where are your ICAs stored? How many ICAs do you have? Do your ICAs cover all intercompany transactions? What gaps do you have? Are all your ICAs signed and dated? Who is responsible for keeping them up to date? To what extent is group legal involved? How often do you review your ICAs? What’s your process for updating ICAs / putting in place new ICAs? Who signs for each entity? To what extent are legal entity directors briefed on what they are signing? Do you terminate old agreements? Do you ever try to ‘backdate’ your agreements? How do your master files and local files link in with the contractual terms of your ICAs? How do you reference ICAs in your ERP systems? Do you have profit split agreements? Do you have CSAs / CCAs with platform contribution transactions? Do you have cash pooling arrangements? Do you have LRD agreements? Do you use declining royalty arrangements for IP? Do you use loan notes for documenting intercompany debt? Do you have templates for each transaction type? Do you use multiparty agreements or individual agreements? How long are your ICAs? How many pages? How specific are your pricing clauses? Do you use ‘evergreen’ agreements, or agreements with fixed termination dates? What termination notice periods do you use? Which laws apply to your agreements? Do you prepare translations / bilingual agreements? Who else in the group has an input into the form and content of your agreements? Who else in the group is preparing agreements? (e.g. for GDPR, IP, compliance). Do you have duplicating agreements? When you acquire groups, how do you deal with their ICAs? #TransferPricing #LegalSubstance #IntercompanyAgreements

As you may have seen, earlier this year, HMRC released updated operational guidance on transfer pricing and the role of risk which seeks to codify HMRC’s views on the topic. The UK EY team has been meeting with a number of clients to discuss how HMRC’s operational guidance on the OECD’s six-step analysis of risk (published in the International Manual) will impact MNE groups, informed by our practical experience in HMRC enquiries of how the guidance is being applied.    Our transfer pricing team has developed a new offering for clients enabling them to assess the robustness of their analysis and documentation of economically significant risks (ESRs) and risk control functions. The EY ESR Assessment is a structured analysis giving clients a clear assessment of their position and prioritised recommendations to address areas of potential challenge.    For further information, please reach out to me or your EY UK contact.

We are happy that our article “The Microsoft Case: Lessons for Post-BEPS Software Development Cost Contribution Arrangements” was published by Tax Notes International. Finding automated transfer pricing solutions for ensuring that collaborative software engineering complies with the arm’s length principle is what drives our professional and scientific interest at Kolabri. The increasingly complex and decentralized value creation in software engineering presents one of the most critical challenges for #tax and #TP professionals. With cases such as the Microsoft providing illustrative evidence of the tax risks at stake. In our article, we take the Microsoft case as a starting point to identify and discuss critical issues such as #substance requirements as well as challenging preconceptions on #value-added attributable to legacy #IP vis-à-vis ongoing #development activities. In addition to scrutinizing selected qualitative arguments pertaining to the Microsoft Case, we outline quantitative approaches to test and validate such arguments. While the Microsoft Case is rather idiosyncratic, we attempt to derive generalized “lessons learned” for MNEs undertaking #decentralized approaches to #collaborative #software #engineering. Knowing that many of the issues are rather novel and emerging, we at @Kolabri are happy to brainstorm with professionals dealing with similar cases (highly appreciated earlier discussions esp. with you Dr. Klaus Dorner, Richard Slimmen, and Philippe Paumier). Lastly, a great thanks to the kind team at Tax Analysts for the smooth editorial process. Please, find the article under: https://lnkd.in/ewWYjcGF