Abraham Lincoln quoted as saying “ Give me six hours to chop down a tree and I will spend the first four sharpening the axe. ” An axe is a strength multiplier. You can be the strongest lumberjack in the world, but with a dull axe, you are no good than a 5 year old.
In today’s world where the wars are fought with words, and the information is available on click of your mouse (or by touch), the lumberjack’s axe referred about could be a sharp and smart document that he/ she could produce. The principle remains consistent when you draft a taxation document, especially either a transfer pricing memo or transfer pricing inter-corporate agreement (ICA).
A 50 pager agreement in an inter-corporate scenario is a thing of past. The relevance of what is written and how is written has the maximum weightage. The difference between a sharp and a blunt document (including an ICA) is the transfer pricing adjustment and further getting such adjustment and tax impact confirmed at the higher litigation levels.
So how should you keep the ICA relevant and sharp, here are the top 6 points that you should take care while drafting a transfer pricing ICA.
Reality First: Stay close to the actual business transaction. A draftsman often is so involved in perfecting the document from the drafting point of view that he forgets to keep the document as real as possible. In transfer pricing, the functional analysis (FAR) is the first step and the ICA follows the FAR. Care to be taken never to twist the equation.
Copy paste: Copy paste is a function in documentation applications like Microsoft Word to make the life of draftsman easy but it is not meant to make the life of the user of the document miserable. Copy past blunders could pull you back in transfer pricing proceedings. A single typo could make a ‘contract manufacturer’ a ‘ manufacturer’ that could have far-reaching implications.
ICAs are expensive: If you as a business think that involving transfer pricing experts on drafting ICAs are expensive and this is something your commercial colleagues could undertake, as they know the business well; there is a bright possibility that few months down the line in the tax audit/ assessment the cost of such decision could be exponentially expensive than the fees. Leaving the right jobs for experts could help your business grow exponentially and not the taxes on your business.
Cost plus arrangements: As all the Indian food is not spicy and as all the Italian food is not pasta, it is important to note that all cost plus arrangements are not the same. Every business offering in the value chain is unique and such uniqueness needs to be respected in the transfer pricing dealings and documentation.
Transfer pricing documentation and ICA: Transfer pricing documentation is different from a transfer pricing agreement. The outcome of both the pieces of information should be consistent and in line with the business realities. Further, the transfer pricing policy is also different from an agreement. A policy is something that is followed by a group in certain nature of the international transaction, while an agreement is specific to the transaction between the parties.
Simple vs. Complex : The users of the ICA are the tax authorities, who may be used to reading general commercial contracts rather than the legal terminologies. It is advisable to keep the language free lowing rather than use of technical legal jargons.
As harmful it is to self medicate when you are sick, it could be equally harmful to your business health when you self document without considering transfer pricing nuances. A transfer pricing specialist would be able to help you achieve your objectives around transfer pricing documentation and more specifically the ICA. Helps a business to focus on its core and walk on the path of growth.