What Are Intercompany Agreements?
Intercompany agreements are contracts made among two or more businesses or divisions owned by the same parent company.3 min read
2. Purpose of Intercompany Agreements
3. The Benefits of Intercompany Agreements
4. Tips For Creating Intercompany Agreements
Intercompany agreements are contracts made among two or more businesses or divisions owned by the same parent company. It is a contract that refers to the internal transactions of sales or transfers of goods and services between the businesses. The reason for an intercompany agreement is to deal with certain factors of the parent company with the cooperation of both divisions of the same corporation.
One advantage of intercompany agreements is that it helps keep the different financial statements and information of the two businesses separate. All transactions have individual services outlined so they do not clash with each other. These agreements are useful when there is more than one division in the parent company. Other details in the agreement include the date, the names of the entities, and what goods and services are being transferred. An intercompany agreement is also useful for ending a contract that was formed between two businesses under the parent company.
What Are Intercompany Agreements?
Intercompany agreements (ICAs) describe the legal terminology on which financial support, products, and services are offered within a group. ICAs can blanket a wide range of situations, including back and head office services, cost and revenue sharing, intellectual property licenses, etc. It has been recognized that intercompany agreements are a basic part of Transfer Pricing compliance and with the utilization of the OECD's (Organisation for Economic Co-operation and Development), BEPS (Base Erosion and Profit Shifting) direction by an increasing amount of countries annually. This specific significance is getting monumental only for financial institutions and multinational enterprises.
The OECD stated about this situation in 2010: “Contractual arrangements are the starting point for determining which party to a transaction bears the risk associated with it. Accordingly, it would be a good practice for associated enterprises to document in writing their decisions to allocate or transfer significant risks before the transactions with respect to which the risks to be borne or transferred occur…”
The importance of ICAs, like other types of compliance documents, frequently only becomes evident when a group is necessitated to answer to a regulatory or tax audit with little notice.
Purpose of Intercompany Agreements
Companies are not capable of profiting from intercompany sales. So, businesses or divisions of one parent company are expected to give an account of intercompany transactions using a specific method. The purpose of intercompany agreements is to define the way transfers take place and to determine from the financial results what actions are needed for all parties involved.
The Benefits of Intercompany Agreements
Corporations that have several divisions can benefit from intercompany agreements because they are able to transfer the goods and services to a place in the corporation that will benefit the most from it, without incurring negative tax results. Also, by separating goods and service transfers brought about by intercompany agreements resulting from other transactions, they are able to help the corporation, and its businesses, more effectively interpret and analyze inventory and sales information.
Tips For Creating Intercompany Agreements
- Utilize recitals to your benefit. Even though it isn't part of the legal agreement, recitals are able to explain a taxpayer's position in simple terms. For example, if a distribution plan is known to be a limited risk, make it known in a recital. If certain aspects of history are useful for comprehending the intent of an agreement, make the history available in a recital.
- Make certain that the intended subject matter of the arrangement is made clear by way of contractual language. For instance, if a taxpayer is attempting to establish a limited-risk arrangement, substantial supplies in the agreement should reduce or prevent a party's risks, e.g., clarifying which merchandise poses certain risks, and which costs can be reimbursed. Just providing an adjusted, lower operating margin or utilizing a cost-plus pricing transfer method to get a limited-risk arrangement is highly unlikely, without giving more, for a benefit.
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