What every tax professional needs to know about Intercompany Agreements for transfer pricing compliance

Paul Sutton, LCN Legal

Intercompany Agreements (often referred to as ICAs) are legal agreements between related parties. They define the legal terms on which services, products and financial support are provided within a group.

Why do multinational organisations need them?
It has long been accepted that ICAs are a fundamental part of Transfer Pricing compliance for multinational groups. With the implementation of the OECD’s BEPS guidance by an increasing number of countries each year, this importance is only increasing for multinational enterprises and financial institutions.

ICAs form part of the “Local Files” required for BEPS compliance. More fundamentally, the legal nature of the intercompany flows of assets, services and finance is at the heart of a group’s business model which is required to be described in its BEPS ‘Master File’.
There are also a variety of non-tax drivers for putting in place ICAs. These include:

• Regulatory compliance (where one or more members of the group are regulated entities, for example, in the financial services and insurance sectors)
• Ring-fencing assets and liabilities from risks
• Improving the corporate governance of companies throughout the group
• Reducing personal liability risks for directors
• Supporting the external and internal audit of group entities
• Ensuring that intellectual property rights can be enforced and monetised appropriately

What are the consequences of not having appropriate ICAs in place?
Fundamentally, groups which do not have appropriate, signed ICAs in place are exposed to the risk of unnecessary Transfer Pricing adjustments, fines and penalties. This is because they are unable to present a clear statement as to what intra-group supplies are being made and how risks are allocated between group companies.
The tax / transfer pricing consequences of not having appropriate ICAs in place include the following:

• In certain jurisdictions, corporate groups are routinely subject to fines and penalties, simply for failing to produce signed ICAs when requested
• Expenses may be disallowed
• Post year-end “true up” type adjustments may be rejected
• Local tax authorities may be more likely to attempt to recharacterise a transaction as something other than that claimed by the taxpayer
• Groups may be subject to adverse Transfer Pricing adjustments and associated fines and penalties

In summary…

Getting your Intercompany Agreements in place and ensuring a streamlined ‘future proof’ process is not a ‘nice to have’ for a multinational organisation. In order to minimise challenges from global tax authorities, ONESOURCE Transfer Pricing Intercompany Agreements helps you centralise and efficiently manage intercompany agreements so that they can be properly generated, updated and analysed. Click here to find out more.
This blog is an extract of a full report published by LCN Legal on the importance of Intercompany Agreements. LCN Legal specialise in the legal design and implementation of Intercompany Agreements. You can access the full report here.