Intercompany agreements maintenance service

Maintenance of intercompany agreements is absolutely vital. As a group’s structure and activities change, it will need to amend its intercompany agreements or create new ones. Failing to do this can have serious consequences.

LCN Legal can maintain a comprehensive, secure, cloud-hosted archive of signed copy ICAs. As part of this service, we carry out regular checks: we contact the relevant people within the group, and find out whether circumstances have changed which may require changes or additions. This can be done annually, or more frequently if required. We also provide telephone support when required, for example to access copy agreements or to obtain advice on specific issues as they arise.

As a result:

• You have access to ICAs at short notice when you need to respond to TP enquiries and audits
• ICAs are aligned with your group’s structure, operations and TP policies
• ICAs are properly signed and dated by all relevant group entities
• Local translations and notarisation or legalisation are arranged for you, wherever required
• ICAs are updated as required to reflect changes in the group, its operations and its TP policies

Our approach

Our approach to managing Intercompany Agreements (ICAs) is based on eight basic principles.

1. Create a comprehensive central archive of signed and dated ICAs

From a tax and transfer pricing perspective, the primary function of ICAs is to help MNEs respond quickly and accurately to tax audits and inspections, head off protracted investigations and avoid unnecessary fines, penalties and adjustments. Copies of ICAs are often one of the first things requested by tax administrations in TP audits.

This means that it is essential to create and maintain a comprehensive central archive of signed and dated ICAs, which reflect and support the group’s TP policies, functional management and operations during each respective financial year.

Leaving the vital role of managing ICAs to local tax managers can result in agreements which contradict each other or which are not easily accessible when needed. It also duplicates cost and effort.

2. Align ICAs with TP policies

TP policies need to be implemented in legal (and operational) reality, and cannot just be a ‘fantasy’ or a ‘wish list’. The November 2020 decision in Coca-Cola has shown how vulnerable the TP policies of an MNE can be, if they are contradicted by ICAs on key terms such as pricing, allocation of risk, and ownership of intangible assets.

Tax administrations will naturally look for and exploit weaknesses. If ICAs are found to contradict TP policies, the ownership of valuable assets such as IP or the group’s operations, tax administrations will adopt whatever interpretation is most advantageous to their position.

3. Identify and involve all key stakeholders in the design of ICAs

ICAs are not just required for TP compliance. They also play a key role in matters such as regulatory compliance, customs duties, exchange control, VAT / GST compliance, asset protection, IP management, data protection and corporate governance compliance. This means that it is essential to approach the design and maintenance of ICAs on a cross-functional basis, so that the strategic and compliance needs of the different stakeholders can be taken into account.

4. Implement ICAs in advance, not after the event

In many intercompany transactions, the allocation of risk is a key factor in pricing. The OECD’s TP Guidelines are very clear that risk cannot be contractually allocated after the event. IRS TP guidance takes a similar position, and states that ‘Risk analysis should be consistent with intercompany agreements’, and not the other way around.

We help MNEs put in place systems so that this fundamental requirement is met and maintained on an ongoing basis.

5. Streamline and standardise ICAs to achieve consistency

This is key to minimising the administrative burden and cost of maintaining ICAs. The starting point is to analyse the key intercompany transaction types within the group, and create template ICAs and standard terms which clearly reflect the intended pricing, allocation of risks and functions, and ownership of intangibles and other valuable assets.

Overly long agreements based on third party commercial contracts should be avoided. Amongst other things, they are often hard to read, lack the specific functionality required for TP purposes, and may contain procedural provisions which are not followed by the group in practice (another point raised by the court in the Coca Cola case). These features all undermine the credibility of the group’s TP documentation.

6. Localise ICAs as needed

It is rare for local tax or regulatory laws to be prescriptive as to the form or content of ICAs. Exceptions include ICAs involving regulated entities, and cost sharing / cost contribution agreements in the US or cash pooling agreements. The localisation of ICAs more often involves adapting the commercial variables (such as cost plus mark ups or interest rates), accommodating tax sensitivities (such as withholding tax on management charges or interest) and of course producing translations / bilingual agreements where needed. Some jurisdictions require notarised or certified translations, but again this is less common.

7. Brief local entity directors on what they are being asked to sign, and why

The decision of subsidiary boards to enter into ICAs to implement group TP policies should not be explained by reference to “we were told to sign by the tax function or group leadership”. Local directors owe duties to local employees, creditors and other stakeholders and should consider the terms of ICAs and the implication of signing them on their merits. For this reason, a good corporate governance record is essential and should be signed and retained with completed ICAs, so that these records are available whenever tax administrations request copies of ICAs. Our service for multinational clients includes board briefing notes and this governance record in every case.

8. Regular review and maintenance

Many groups are undergoing constant, dynamic change – whether this is as a result of acquisitions or adapting business models, supply chains and strategies

We recommend quarterly contact with key stakeholders, to identify whether any changes have taken place which impact the content or scope of TP policies and corresponding ICAs. Together with annual reviews, this helps ensure that TP documentation accurately reflects the legal arrangements in place during the relevant financial period. We use automation tools to assist in this maintenance process to ensure that quarterly and annual reviews minimise management time.