Intercompany agreement – easy to forget, much to regret Intercompany agreement – easy to forget, much to regret Intercompany agreement – easy to forget, much to regret

This blog addresses the importance of accurate intercompany agreements

Multinational companies have typically a defined transfer pricing system with a written Transfer Pricing (“TP”) policy including a definition of methods, mark-ups and margins. This is often accompanied by a basic or more sophisticated TP compliance approach. But what happens in between the TP policy and TP compliance?

Simply put, companies will have to be ready to demonstrate not only that their actual TP outcomes are in line with their TP policy, but also that they are managing their transfer prices appropriately. Our blog series will shed some light on three key topics:

Part I - Intercompany agreements

While seemingly a relatively simple administrative task, intercompany transactions executed without a proper contractual basis or based on outdated agreements can all too easily open the door to challenges from the tax authorities. Typical examples include:

• Intercompany services: tax authorities often try to challenge the benefit of an intercompany service received and thus deny its tax deductibility. While it is challenging enough to convince tax authorities of the benefits of services, poorly written service agreements unnecessarily weaken the taxpayer’s position. Taxpayers are advised to ensure that the actual services provided are covered in the agreement, the stated pricing methodology is still valid and that the form and substance of the intercompany agreement in general meets criteria that would be expected from a third-party service agreement. Continuing to rely on lean, two-page intercompany agreements is not a recommended option. 
• Functional profiles and profitability: intercompany agreements formalize the allocation of functions, risks and assets between related parties as well as the intended compensation for the parties. In practice we have regularly seen that the actual facts and circumstances are not adequately reflected in intercompany agreements, e.g. foreign exchange risks or bad debt risks are in fact borne by the distributor, while the agreement states that these risks are borne by the Swiss parent company. In such situations it can prove to be difficult to argue that losses due to these risks should be tax-deductible in the distributor’s tax domicile. 

While these are straightforward use cases, they illustrate the importance of keeping intercompany agreements up-to-date and of preventing inaccurate agreements creating or increasing transfer pricing risk. For this reason, we recommend as a first step to gain full transparency on the status of your intercompany agreements (are all intercompany transactions covered by agreements or are there any gaps?) and to check whether the existing agreements adequately reflect your current facts and circumstances. Going forward, it is also recommended to establish a process to keep intercompany agreements up-to-date and store agreements in a central location that is accessible to the relevant stakeholders.