The establishment of suitable Intercompany Agreements (ICAs) is a continuous initiative rather than a singular undertaking. This is attributable to the dynamic nature of the group’s composition, subject to alterations resulting from acquisitions, organic growth, or organizational reconfiguration. Additionally, the group must periodically revise its Transfer Pricing (TP) compliance strategies due to modifications in tax legislation, alterations in business models, functions, product and service portfolios, value drivers, and market conditions.
The introduction of new transactions or alterations in the characteristics of intragroup transactions may necessitate the creation of new ICAs or revisions to existing ones. This necessitates ongoing monitoring. Typically, the maintenance of intercompany agreements involves a structured process encompassing five key stages or steps.
Step 1: Scoping
The initial step involves a comprehensive review of the group’s draft transfer pricing policies and group structure chart to identify the principal intercompany transaction types applicable to the group (or subgroup) in question. Transaction types may encompass central support services, the appointment of limited or full-risk distributors, Research and Development (R&D) services, intellectual property licenses, transactional profit splits, and intercompany loans.
Each transaction type necessitates a corresponding agreement. For groups with intricate arrangements, prioritization of transaction types may be required based on associated risks from commercial, regulatory, and tax perspectives. The initial scoping phase may also involve an assessment of the likely involvement of legal entities in relevant transactions, whether as a supplier or recipient, licensor or licensee, lender or borrower, and so forth.
Step 2: Review
The subsequent step involves a meticulous examination of draft transfer pricing documentation, existing ICAs, group structure charts, legal entities involved, ownership of intellectual property and other intangible assets, and the group’s contracting model with third parties.
This review is centered on comprehending the commercial and legal nature of each transaction type, the intended or implied allocation of economically significant risks, ownership and control of intangible assets, and the intended pricing models. The primary objective is to achieve a demonstrable alignment between TP policies and agreement terms. A key outcome of this stage is a comprehensive list of legal documents and actions required to implement intended TP policies, which may involve corrective action for prior periods.
Step 3: Drafting ICAs covering each of the relevant transaction types
This step entails the creation of discussion drafts of ‘master’ agreements for each relevant transaction type. The recommended approach is to ensure clarity and unambiguity, legal binding, simplicity of language, brevity, and alignment with intended tax and TP treatment.
Step 4: Finalising the draft ICAs
This phase involves accommodating the needs of key stakeholders before finalizing draft ICAs. Considerations extend beyond tax and TP issues to encompass regulatory compliance, customs, sales taxes, Intellectual Property (IP) protection, HR compliance, and asset protection.
Standardization of ICAs on a global scale is generally recommended, with potential for localization to address local regulatory or tax nuances. A risk-based approach is advocated to allocate an appropriate level of time and budget for localization efforts.
Step 5: Implementation
This involves preparing individual ICAs for signature, along with ancillary documents and filings outlined in the relevant implementation plan. Obtaining necessary corporate approvals at the level of relevant legal entities is critical, involving the preparation of briefing notes for directors to articulate the commercial rationale for the arrangements.
Upon signing and dating the relevant documents, it is imperative to compile signed copies and archive them in a centralized repository with appropriate access rights.
Regular monitoring is crucial; a group’s portfolio of ICAs must be consistently updated to reflect evolving intercompany transactions. This monitoring and review should occur at least annually, and often more frequently. Identification of relevant changes will necessitate the repetition of Steps 1 to 5, as described above.
In conclusion, the development and maintenance of audit-ready Intercompany Agreements (ICAs) within multinational groups is an ongoing and multifaceted process. The dynamic nature of group compositions, coupled with changes in tax legislation and business dynamics, necessitates a structured approach. The five key stages, from scoping to implementation, outline a comprehensive strategy. This involves identifying transaction types, reviewing and aligning transfer pricing documentation, drafting clear and legally binding ICAs, considering stakeholder needs, and implementing agreements with thorough consideration of regulatory, tax, and compliance aspects. Regular monitoring is emphasized to ensure the alignment of ICAs with evolving intercompany transactions, requiring periodic repetition of the outlined steps for optimal compliance and effectiveness.
Author: Eddie Opiyo