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Form over substance: The post-BEPS resurgence of the inter-company agreement

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Deloitte Australia’s Liam O’Brien looks at how the inter-company agreement is making an important comeback, and how its form can affect its commercial and economic substance.

In the post-BEPS transfer pricing world, there is no doubt that the substance of an arrangement takes precedence over its form. This has been made abundantly clear in transfer pricing guidance and legislation in Australia and around the world, and the importance of companies demonstrating the commercial and economic substance of their transfer pricing arrangements cannot be overstated.

Despite the focus on substance over form, the author contends that the inter-company agreement is making an important comeback, and that the form of an arrangement can have a significant and influential effect on the commercial and economic substance of that arrangement.

It is evident that inter-company agreements remain important to tax authorities. Taxpayers are frequently asked to provide copies of their inter-company agreements in transfer pricing enquiries, and the Australian Taxation Office (ATO) even requires Australian taxpayers to include inter-company agreements with the lodgement of the Australian local file.

In the remainder of this article, the author considers four reasons why companies should consider reviewing, modifying and/or redrafting their inter-company agreements in the post-BEPS era. The reasons discussed are not exhaustive, but they are linked by a common theme – that the form of an arrangement can influence the substance of that arrangement – and therefore show why inter-company agreements remain important in this pro-substance transfer pricing world.

Starting point for demonstrating substance

A well-drafted inter-company agreement can provide a solid foundation for demonstrating the substance of an arrangement.

In particular, the clauses outlining the conduct/responsibilities of the parties can be used to define the functions performed and risks assumed by the parties, as well as their expected outcomes at the time of entering into a transaction, having regard to the guidance outlined in the 2017 version of the OECD transfer pricing guidelines.

The concept of risk, in particular, is given significant attention in the OECD transfer pricing guidelines. An intercompany agreement can be drafted to identify the significant risks, provide who is responsible for managing and controlling those risks, and who bears the consequences of those risks should they be realised.

Inter-company agreements may also provide a starting point for addressing other transfer pricing sensitive concepts, such as risk management, an important new concept included in the 2017 version of the OECD transfer pricing guidelines. Risk management refers to the function of assessing and responding to risks, and includes: (1) the capability and performance of the decision to take on, lay off, or decline a risk-bearing opportunity; (2) the capability and performance of the decision on whether and how to respond to the risks associated with the opportunity; and (3) the capability and performance of risk mitigation.

Properly drafted intercompany agreements can specify which entity has the right to make these important risk management decisions.

Without an intercompany agreement, the starting point of the functional analysis is the parties’ conduct (that is, the substance itself), which may lead to tax authorities forming their own views on the functions, risks, and expected outcomes and how arm’s length parties would act.

Assist with the effective development and implementation of transfer pricing policies

The preparation and execution of an intercompany agreement is good practice in developing transfer pricing policies that accord with the OECD’s transfer pricing guidelines.

For instance, the OECD’s guidelines set out a six-step process for analysing risks. Step 2 of that process requires the determination of how specific, economically significant risks are contractually assumed by the associated enterprises under the terms of the transaction.

The absence of an intercompany agreement (or an ineffective/incomplete agreement) makes it difficult to apply step 2 of the recommended process for analysing risks. This may raise questions as to whether the transfer pricing policy has been thoroughly developed and implemented, having regard to the appropriate guidance.

Moreover, the implementation of transfer pricing policies is often removed from the tax function inside a company, and responsibility is placed on the operational departments. A detailed intercompany agreement can provide a framework and defined reference point for operational departments to refer to in their everyday commercial activities. The legal formality of an intercompany agreement can often be the incentive required for operational departments to adhere to the company’s transfer pricing policies, thereby driving the conduct of the parties and contributing to the substance of the arrangement.

Indicia of arm’s length behaviour

It is standard practice for third parties to execute legal agreements setting out the terms and conditions that govern a particular arrangement/transaction. It would be highly unusual for any business to enter into a significant arrangement/transaction with a third party without a fully executed, written legal agreement, enabling each party to legally enforce the promises made in entering into the arrangement/transaction.

Given that the arm’s length principle is the international standard adopted by OECD member countries, it follows that related parties, exhibiting arm’s length behaviour would also prepare and execute written agreements setting out the terms and conditions of the arrangement in question. Such evidence of arm’s length behaviour can further assist in establishing the commercial substance of an arrangement.

Evidence of a robust tax governance framework

Tax authorities are increasingly questioning taxpayers on their approach to tax governance. The ATO has published a tax risk management and governance review guide, which is intended to assist Australian taxpayers in understanding what the ATO considers to be good tax governance practices. The ATO also typically asks taxpayers to describe their approach to this guide as part of a streamlined assurance review.

A fully executed (that is, signed by both parties) intercompany agreement can be used as an example of a formalised document endorsed by senior management, for the purposes of demonstrating that robust tax governance controls are in place. It can be provided as evidence that relevant personnel within an organisation have adhered to a process, whereby they have seriously considered – and reached agreement regarding – a particular intercompany arrangement. This provides a robust formalised control that assists in ensuring that relevant transfer pricing laws and guidance are taken into account.


This article attempts to articulate why the preparation of inter-company agreements is experiencing a resurgence in the post-BEPS transfer pricing environment. The reasons given are by no means exhaustive; however, they do reveal a common theme – that despite the substance-over-form maxim taking precedence in the post-BEPS transfer pricing world, the form of an arrangement can (and often does) influence substance.

In this context, companies should be reviewing, modifying, and in some cases redrafting their inter-company agreements in accordance with the revised OECD transfer pricing guidelines and the substance underlying their transfer pricing arrangements.



Liam O’Brien, director of Deloitte Australia,

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