This article is for you if you’re a CFO in an international advertising, PR and marketing agency, and you need to put in place intercompany agreements to support your group’s transfer pricing compliance strategy.
1. Identify and prioritise the intra-group supplies to be documented
You may already have done this as part of your work with transfer pricing advisers. Depending on your business model and business structure, your main internal supplies may comprise:
- Licensing of intellectual property (trade marks, know-how, content etc)
- Strategic services provided by the parent / head office function to local subsidiaries
- Back office functions (such as HR, finance, compliance etc)
- Supplies made by and to local subsidiaries and the parent company, where multiple entities within the group are contributing fee-earner resource on cross-border client projects and on shared client accounts.
- Finance (loans and other forms of financial support)
You probably already know which particular supplies need more urgent treatment – for example, those relating to sensitive tax jurisdictions, or where a local tax audit is expected.
2. Establish which stakeholders within the group need to be consulted
Intercompany agreements and intercompany charges are not purely a matter of transfer pricing compliance. They also have an impact on matters such as how the group can enforce its intellectual property against third parties, and how liability is ring-fenced within particular group companies. In order to avoid mistakes, duplication of agreements and unnecessary back-tracking, it is important to identify all the relevant stakeholders for the project, and involve them as necessary. For a more detailed checklist, see the link at the end of this article.
3. Align ownership of intellectual property
It may be that intellectual property is not held in the right place within the group – especially if the group has grown by acquisition, and those acquisitions have not yet been integrated from a legal perspective. Now is a good opportunity to correct this by transferring intellectual property so that it is held by the entity which will continue to receive royalties.
4. Prepare appropriate template intercompany agreements for each type of supply
One of the key functions of intercompany agreements is to properly reflect the assumption of risk by the respective group companies. Legal terms such as warranties and indemnities, service levels, minimum purchase obligations, ownership of IP and duration will underpin the allocation of risk, and will provide a solid starting point for any discussions with local tax inspectors.
The level of detail required for each agreement will vary according to the type of supply and the perceived level of risk. For example, basic back-office type services, charged for on a cost plus basis, may only require brief legal agreements. More complicated arrangements, such as licensing of IP and know-how, often require more in-depth consideration.
5. Communicate the proposals appropriately to parent and subsidiary boards
Depending on the group’s culture, the level and basis of intercompany charges may or may not be negotiated internally as between the parent company and subsidiary companies, before they are settled. Even if they are not usually negotiated internally, it is important to manage the process of communicating any changes in the group business model and basis of charge, so that you have a paper trial showing that parent and subsidiary boards have “exercised independent judgment” when reviewing the arrangements. This does not need to be complicated – often it will be in the form of a board paper, explaining the rationale for the approach taken, and what it means for subsidiaries.
6. Standardise production and signature of individual agreements
This makes it easier both to roll out the new agreements, and to maintain them going forward. Electronic signature tools (such as Adobe’s Echosign) can be useful to avoid the need for signatories to have to print out, sign and scan agreements.
7. Establish appropriate ongoing procedures
Putting in place intercompany agreements is not just a one-off task. There’s no point in doing it at all if copies of the signed agreements cannot be accessed quickly by the appropriate people, when they are needed. Similarly, the agreements are of little use if they are out of date and do not reflect the group’s current business model and the legal entities involved. All this means that it is important to have ongoing documented processes and controls, dealing with the updating of your intercompany agreements as required.
For a more detailed checklist and project planning form, click here.
If you need help with your intercompany agreements, we would be delighted to hear from you. We've helped people like you in businesses across Europe, the USA, Asia and elsewhere, and we would be delighted to help you too. We specialise in international legal structures and intercompany agreements. Our work complements that of your existing tax and transfer pricing advisers, so you don’t need to cut across your existing relationships.
We can provide as much or as little support as you like. Perhaps you just want the comfort of knowing that you are approaching the project in the right way – in which case, a consultation together with some generic template agreements may be all you need. Or perhaps you want someone to handle the whole thing for you – in which case we will be happy to oblige. You can simply email us at firstname.lastname@example.org with an outline of what you need, and we will be in touch to arrange a consultation.