Ongoing processes for maintaining TP audit-ready intercompany agreements

A typical process for maintaining intercompany agreements follows five key stages. We will go through this process every time we start working on intercompany agreements with a new client.

We will also monitor and review the group’s intercompany agreements periodically – every year, perhaps, or more frequently if appropriate. This covers:

• Any changes in the group structure, such as the acquisition, incorporation, dissolution, reorganisation or disposal of group entities
• Changes in transfer pricing policies
• Changes in the profiles of comparable transactions and benchmarking
• Changes in group’s business activities or functions
• Changes in the regulatory environment

The review may reveal that the process needs to be undertaken again.

Step 1: Scoping

Step 2: Review

Step 3: Drafting template ICAs

Step 4: Finalising the template ICAs

Step 5: Implementing the template ICAs

Let’s look at each of those in more detail.

Step 1: Scoping

The first step is usually an assessment of which intragroup transaction types are likely to require the creation of an ICA. This generally involves a high-level review of draft transfer pricing reports, policies, structure charts and so on.

Next, make an initial assessment of which legal entities are likely to be involved in the relevant transactions, whether as supplier, provider, licensor, buyer, customer or licensee.

Then identify what ICAs already exist in relation to those transaction types (if any).

Finally, work out how to prioritise the different transaction types.

Step 2: Review

The aim here is to create a list of all the legal entities that participate in the relevant intercompany transactions.

For each transaction type:

• Review the draft transfer pricing documentation. Identify the intended allocation of functions and risks, and the intended pricing and other terms
• Review any existing ICAs. Check that they are consistent, and are aligned with the group’s transfer pricing model and its other objectives
• Review the legal and beneficial ownership of relevant assets (including intellectual property)
• Review relevant ‘upstream’ and ‘downstream’ transactions with third parties. For example, in relation to a supply chain for the sale of goods, it may be appropriate to review the sample sale of goods or distribution agreements.

Step 3: Drafting template ICAs

The next step is to prepare discussion drafts of the template ICAs for all of the relevant transaction types. There will be many different templates. For example, all of the following transaction types require different ICAs:

• Central support or head office service charged on a cost plus basis
• Appointment of limited risk distributors or resellers of goods, services or software, remunerated on a TNMM basis
• Licences of intellectual property (including the assignment back of improvements in the IP)
• Profit split agreements
• Cost sharing or cost contribution arrangements
• R&D agreements
• Toll and contract manufacturing agreements
• Shared services arrangements
• Cash pooling agreements
• Intercompany loan agreements and credit agreements
• Loan note instruments for documenting intercompany debt in security form

Step 4: Finalising the template ICAs

The basic process here is usually:

• Obtain input from each of the relevant functions and stakeholders within the group, including any external TP advisors
• Where necessary, escalate and resolve any conflict between the needs or requests of different functions
• Review and resolve any potential overlap between different templates (for example, fees for support services, which may form part of the calculation of a net margin return for distribution activities, or payment provisions for goods or services, which may overlap with the treatment of intercompany balances under loan facility agreements)
• Document the termination or variation of any existing intercompany agreements

Step 5: Implementing the template ICAs

This typically involves the following steps:

• Confirm the legal entities (and, where applicable, branches/permanent establishments), which are required to participate in the arrangements
• Confirm any necessary variations or additional requirements for specific locations or entities, such as local language translations, notarisation or variations in pricing or other terms
• Prepare briefing notes for directors of participating entities to approve the arrangements; allow for any questions or discussion of the proposed terms
• Populate and finalise the individual agreements for signature
• Arrange for signatures to be obtained (using electronic signatures, where appropriate)
• Collate the signed copies and archive them in a central repository with appropriate access rights

Regular monitoring is absolutely essential: there is no point investing time and resource in creating a set of ICAs if, at the time they are needed, they have become ineffective.