When assessing the impact of exceptional (market) circumstances in view of transfer pricing, a first step is to review the contractual relations of intercompany dealings. Intercompany agreements may include detailed information on the functions performed or risks incurred by the parties, and even provide insight in certain specific items related to such exceptional (market) circumstances (e.g. management of strategic risk, business continuity, etc.).
Certain intercompany agreements include force majeure clauses. The definition of force majeure can be different from agreement to agreement, but generally, it can be defined as unforeseeable circumstances, not within the reasonable control of the party that prevent a party from fulfilling a contract. Intercompany agreements may have included specific clauses linked to the effect of such force majeure, such as indicating which of the parties incurs specific costs, obligations and liabilities of parties, etc.
Even in cases where such clauses are included in agreements, companies should consider what third parties are doing in comparable circumstances in order to be aligned with the arm’s length. The impact of the COVID-19 crisis is very specific in nature for every country, industry, group, group entity, etc. and therefore consequences should always be considered in view of the specific impact.
We recommend that companies reassess the terms and conditions that were agreed upon in the past in light of the COVID-19 crisis, even in the case where changes are only applicable for a certain period of time. Parties should determine the updated terms and conditions in good faith and within their best abilities at the time (as the full impact will only be known later) and act in accordance with the arm’s length principle – i.e. satisfying their options realistically available where the new (temporary) arrangement is in the best interest of both parties.
In case third party agreements within the group are being renegotiated, these could serve as inspiration, where relevant. Updated (temporary) terms and condition could be included in an amendment to the original intercompany agreement, rather than drafting a completely new agreement. Parties can include in this amendment that they will determine the timing to end this temporarily amendment and to reinstate the original intercompany agreement as originally agreed upon or to renegotiate a new intercompany agreement once the parties have a more holistic view on the economic impact of Covid-19 on their business activities. In case the COVID-19 crisis has resulted in significant and structural changes in the intercompany dealings, the preparation of new intercompany agreement will be advisable.
If you have any questions on this subject, please contact the authors of this article:
Andy Neuteleers - Partner (andy.neuteleers@tiberghien.com)
Ben Plessers - Senior Manager (ben.plessers@tiberghien.com)