The LCN Legal Podcast

Paul Sutton and Borys Ulanenko discuss the role of AI in benchmarking for transfer pricing, including the practical problems that AI can address, how AI can help TP professionals to demonstrate that their benchmark analyses are robust, and some common misconceptions around the use of AI. Borys is the founder of ArmsLength.AI. This platform introduces AI solutions to complex tax challenges, streamlining data analysis and enhancing decision-making accuracy. Before ArmsLength.AI, he worked at Aibidia, focusing on digital solutions in the same field.  Paul and Borys discuss: The problems inherent in the benchmarking processThe challenges that TP professionals face when creating benchmarking analysesThe role of AI in addressing these issuesReal-world examples of how AI can make benchmarking analyses that are more robust, and demonstrably soExamples of what ArmsLength.AI does for its clients, and its pricing modelsCommon misconceptions around the use of AI, and what people should consider when assessing any AI tool on the market.

Paul Sutton talks to Sue Bonney, an independent ESG adviser who works with senior people in some of the UK’s largest and most important organisations. In that role she helps business leaders to shape strategic responses to the responsible business agenda and ESG.Paul and Sue discuss: Four ‘lenses’ through which to view ESG issuesThe right way to approach ESG in order to see tangible and useful resultsHer view on ESG scores, and in what respects they can be meaningfulThe relationship between ESG and the standards of tax governance which tax administrations such as the ATO require from corporatesA specific example of a tax strategy statement published by a large corporate which Sue regards as well thought-outKey areas for action that Heads of Tax should considerWhat a ‘targeted intervention’ to help large corporates with their ESG might look like.

The book, ‘Intercompany agreements for transfer pricing compliance: a practical guide’ was first published in March 2019. A revised edition will be published in September this year. Paul Sutton talks about the reasons for writing the original version, the cases and developments since then which have prompted the update, and how the new version will be different. Paul explains: Who the book is forWhat it is trying to achieveHow the transfer pricing world (and the role of intercompany agreements) has changed since 2019The cases and other developments which the new version will coverOther differences between the updated and original versions of the book.

Paul Sutton talks to Filippo Miotto, Transfer Pricing Director at BDO Australia, about the transfer pricing aspects of intangibles, particularly in the light of the ATO’s recently updated draft Practical Compliance Guidelines. Paul and Filippo discuss a range of issues around the draft Practical Compliance Guidelines (PCG) issued by the Australian Taxation Office, including: Why intangibles tend to attract attention from tax authoritiesThe context for the new PCG, and the ATO’s approachThe structure, content and aims of the PCGThe self-assessment reporting process, and the situations in which this is mandatoryExamples of the types of arrangements that are likely to attract more scrutinyWhat sorts of evidence taxpayers may need in order to support their TP arrangementsHow other tax authorities’ requirements may develop in the near futureAustralia’s new Multinational Tax Integrity regimeKey takeaways for groups and their advisers.

Paul Sutton talks to Spencer Ho from RoyaltyStat, which recently became part of Exactera. RoyaltyStat is an industry-leading online database of royalty rates extracted from license agreements and interactive transfer pricing analytics.Paul and Spencer discuss a range of issues around intra-group franchising arrangements, including: ·      a high-level perspective on how franchises work as between unconnected third parties·      the key documents involved·      the key elements of the financial arrangements·      what information is available for the benchmarking of intra-group franchise arrangements·      what factors transfer pricing practitioners should consider, in addition to the headline royalty rates.

Paul Sutton and Paul O’Regan discuss the contractual allocation of risk in transfer pricing. The discussion includes an explanation of why functional analysis alone is not sufficient to delineate transactions for transfer pricing purposes; examples of specific contractual clauses that can deal with risk, and how these relate to each other; and three other key factors which must be taken into account.Paul Sutton gives a detailed overview of contractual allocation of risk in transfer pricing. The discussion looks at:  ·      The definition of risk, for transfer pricing purposes ·      What the legal documentation is trying to achieve  ·      The role of contracts in allocating risk ·      Examples of contractual clauses that deal with risk ·      The other factors that must be considered ·      The potentially serious consequences of getting it wrong ·      Common mismatches between TP documentation and agreements ·      Key takeaways for transfer pricing professionals. 

Paul Sutton looks at the German Finance Ministry’s June 2023 update to its Administrative Principles on Transfer Pricing. The new version confirms some fundamental points that multinationals and transfer pricing professionals need to be aware of. Perhaps the most important is a very clear and specific position regarding ex ante price setting, and the need for intercompany agreements to be implemented in advance, not after the event. Germany’s 2023 update to its Administrative Principles on transfer pricing confirm that the key point in time for the application of the arm’s length principle is the date of conclusion of the relevant intercompany agreement, not the date on which the relevant transaction is performed. This is a crucial distinction, and of course presupposes that appropriate intercompany agreements have been put in place on an ex ante or price setting basis. Although this approach is consistent with the OECD Transfer Pricing Guidelines, it reflects a much clearer and more specific expression of the concept of risk allocation, price setting and the ‘playing out’ of risks and contractually delineated transactions.  Clearly this has big implications for MNEs who are active in Germany, as it’s simply impractical to take one approach there and a completely different one in other territories. Paul Sutton looks at both the technical aspects and what it means in practice.

Paul Sutton talks to Mark Supperstone, Managing Partner of the corporate restructuring specialists Resolve, about how an office-holder in a formal corporate restructuring process involving a UK entity would look at related party transactions in the period leading up to the restructuring. They also consider what implications this has for group structures, and what practical steps legal entity directors can take to protect their position and reduce the risk of personal liability. Applying the arm’s length principle to intercompany transactions within a multinational group can sometimes appear to be a theoretical exercise. But if individual entities or the group as a whole experience financial distress, related party transactions are likely to be subject to scrutiny in a much more pointed way. Office holders in formal insolvency proceedings may be under a statutory duty to investigate the conduct of legal entity directors in the months and years leading up to the insolvency, and directors may be exposed to personal liability or disqualification if they are unable to account for their decisions. Paul Sutton and Mark Supperstone discuss this scenario from the perspective of UK entities in financial distress, and consider key questions such as: The key legal duties of an administrator in a formal administration processThe first steps which an administrator would be likely to take on taking officeThe statutory duty on officeholders to investigate the conduct of directorsHow an administrator or liquidator would be likely to view transactions between the company in liquidation, and other members of the groupKey duties of legal entity directors, and the circumstances in which they may become personally liableThe practical steps which legal entity directors can take to minimise their exposure to personal liabilityThe importance of addressing a potential situation before it develops, and getting informal advice at an early stage.

Paul Sutton and Paul O’Regan discuss LCN Legal’s 5-step process for creating and implementing ICAs. This has been developed over many years, and is designed to ensure that in a tax audit, the group's ICAs will support its TP position. Paul Sutton explains the firm’s 5-step process for creating and implementing effective ICAs. In the course of explaining each stage in detail, he highlights the importance of: Ensuring that ICAs have legal substance, and integrating the legal considerations from the outsetUnderstanding the precise nature of the key transactions, and establishing the ‘legal anchor points’Working effectively with the wider team of TP professionalsDrafting that is brief and clear, using plain languageIdentifying and taking on board the needs of other stakeholdersLocalising agreements to reflect the needs of different countries and entitiesEnsuring that directors have all the information they need to carry out their responsibilitiesCreating – and maintaining – a central online archive of agreements.