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How can we future-proof our intercompany agreements?

Intercompany Agreements

10 May 2021

This is one of the most common questions which come up at the training sessions we run on intercompany agreements for TP compliance.

The short answer is “You can’t.”

You can sign a piece of paper saying that the duties of the parties, the pricing and the risk allocation will automatically adapt to whatever your TP policies might say at any particular time. That might make you feel better today, but it’s not going to help you survive tax audits in the future – or any other kind of audit, for that matter. Because it doesn’t set out what the parties have agreed to do. It’s not a real contract.

However, there are ways you can reduce the ongoing administration of managing intercompany agreements (ICAs). One of those is to use a ‘Netflix’ approach to pricing clauses – in other words, create a contractual mechanism so that one party can unilaterally give notice to the other parties that the pricing has changed.

A bit like the way that banks notify us about changes to interest rates. Or the way that Netflix notifies its customers of changes to the monthly subscription fee.

There are a couple of caveats to the use of this approach, from a governance perspective.

Firstly, it’s unlikely to be appropriate if the quantum of the intercompany charge involved is financially significant from the perspective of the paying party.

Secondly, the ICA should usually provide that the new price only takes effect after a reasonable notice period (which should be specified).

Because of these factors, the most common application of this approach is for support services provided by a parent company or central entrepreneur to multiple service recipients.

Article by
Paul Sutton
LCN Legal Co-Founder

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