For large corporates, the task of implementing and maintaining robust intercompany agreements can seem daunting. In many cases, a group's starting point is intercompany documentation reflecting a variety of inconsistent approaches. Here are some of the most common scenarios we come across, often within different parts of the same organisation:
- No agreements at all
- Duplication of agreements covering the same subject matter (in the absence of a structured process to manage the creation of intercompany agreements)
- One-page agreements with pricing terms and nothing else
- Longer-form agreements with service levels but no pricing (common in regulated sectors)
- Full form agreements, prepared on a cut-and-paste basis from agreements with third parties such as distributors
- Unsigned and partially signed agreements
- Agreements which reflected the business as it was five or more years ago, and which are now hopelessly out of date
- No centralized library of intercompany agreements.
Intercompany agreements have long been needed to support transfer pricing discussions with tax inspectors. Often, when we are asked to help on these projects, it is at the instigation of the relevant group’s internal tax function or its external tax advisers. The question of consistency often arises in this context – what level of detail should be included in the group’s intercompany agreements.
Although transfer pricing is increasingly important, the need for intercompany agreements and their required functionality also depends on wider governance and regulatory issues. (For an overview of common non-tax drivers for intercompany agreements, click here.) To briefly illustrate the governance perspective, consider the position of a subsidiary within a large group. The subsidiary is planning to assume a significant debt obligation (whether as borrower or guarantor), and it depends for its existence on revenues deriving from other group entities. In that situation, how can the directors of that subsidiary possibly comply with their legal obligations to consider the interests of the subsidiary’s creditors, if they do not know the legal terms which underpin those revenues because they have not been properly documented?
Clearly, it is helpful to streamline a group’s approach to the documentation of intercompany supplies. However, in our view this can never be a ‘one size fits all’ approach, even within the same group. The reason is that different types of intercompany supplies within a group will have different risk profiles. A starting point is often to identify the main types of intra group supply, and make an initial assessment of those which are regarded as having the highest risk. This may take into account factors such as:
- The level of the related revenue or profits
- How central they are to the group’s value proposition
- Impact on sensitive jurisdictions (including low-tax and no-tax jurisdictions)
- Regulatory impact
- Imminent or expected tax audits or investigations
- Legal entities or business activities which are exposed to higher solvency risks
This kind of high level assessment and prioritization can help break down a potentially enormous project into manageable chunks, and can help drive the creation of consistent processes using a pilot project.
At LCN Legal, we are happy to work with groups’ in house tax and non tax teams to help address these issues, in conjunction with the group’s external advisers. The following free resources may also be helpful: