What are the differences between intercompany agreements and ‘normal’ agreements?

This question came up on Tuesday, with the lovely people at Thomson Reuters ONESOURCE Transfer Pricing in Canary Wharf. Here’s a brief run-down of the main differences:

  1. Intercompany agreements (also known as ‘ICAs’) are usually much shorter. For example, a typical distribution agreement between unconnected parties would often be 40 to 50 pages in length, plus schedules and appendices. An ICA would typically be 6 to 10 pages in length, sometimes shorter if it’s a very simple arrangement. Brevity in an ICA is extremely important, given the need for it to be read by a number of stakeholders with different backgrounds (corporation tax / TP, VAT, customers, treasury, regulatory etc), not all of whom will have the patience to wade through pages of legal gobbledygook.
  2. The variable terms will usually be kept in one place, rather than being dotted around the agreement. Again, this is to make it easier to manage and update the agreements.
  3. The functionality of ICAs as regards pricing is usually completely different. For example, in a distribution arrangement, the pricing of the relevant goods will often reflect a profit split approach from a TP perspective. This means that the pricing clauses will often look more like a royalty-type calculation, based on net margin.
  4. ICAs are generally light on process, so as to allow for the maximum flexibility and avoid creating unnecessary administration. For example, third party distribution agreements would usually contain order procedures and rolling forecasts of purchases – these provisions would not usually be appropriate in an ICA for a distribution arrangement.
  5. ICAs are also generally light on the specifics of service levels and the specification of goods etc – the primary focus is to provide a clear contractual framework and allocation of risk in relation to the underlying arrangements.
  6. Certain functionality is often required in ICAs which is not typical in third party agreements – such as ‘cost keys’ and ‘allocation keys’, which are to allocate charges across multiple recipients of similar services (e.g. strategic services provided by a parent company), while carving out services which benefit the parent as shareholder.

Aside from those key differences, ICAs share the same intent that they should be fully legally enforceable. In addition, ICAs should provide a clear point of reference for the directors / officers of the participating group companies, so that they can comply with their personal duties to exercise independent judgement in deciding whether to approve the arrangements.

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