What Is an Intercompany Service Agreement

For example, a holding company may hold shares in subsidiaries, but may not conduct active business activities or have active employees. The holding company may therefore conclude an ICA for administrative services with another company in the same group. If you need transfer pricing-compliant intercompany agreements for your controlled transactions, we have something for you. The content of intercompany agreements depends largely on the type of transaction under control and the jurisdictions in which the controlled transaction(s) take place. Complex controlled transactions, such as intellectual property licensing, require detailed contracts. Contracts for manageable transactions, such as . B the provision of management services, can remain simple. Similarly, the professional services framework agreements and the business-to-business service agreements contain only the names and addresses of the applicant`s customers for whom it has provided services, but it is also not stated that these customers are not resident foreign companies operating outside the Philippines. A third-party agreement, on the other hand, is the result of negotiations on the GTC by two independent companies that protect their own interests. Usually, such an agreement is carefully drafted and reviewed before being accepted by both companies.

It is unlikely that either party will be able to unilaterally dictate the terms and conditions of the agreement. One day, the tax authorities knock on the door to inquire about transfer pricing agreements and how they are documented. Pjotr Plastic informs them that there is documentation on transfer pricing, but that there is no intercompany agreement proving that all affiliates have accepted the transfer pricing agreements. In some jurisdictions, year-end adjustments are only permitted if they are made on the basis of a legally binding intra-group agreement in effect at the beginning of each year. Business-to-business agreements (ICAs) describe the legal terminology used to provide financial support, products and services within a group. ICAs can cover a variety of situations, including administrative and social services, cost and revenue sharing, intellectual property licensing, etc. It was recognized that business-to-business arrangements are a fundamental element of transfer pricing compliance and that the OECD (Organisation for Economic Co-operation and Development) management, BEPS (Base Erosion and Profit Shifting) is used annually by an increasing number of countries. This particular importance becomes monumental only for financial institutions and multinational companies. Intercompany agreements clearly allocate the functions performed between the parties, the risk assumed and the assets used, as well as the transfer pricing applied. The following example shows what can happen without transfer pricing agreements: Transfer pricing agreements between affiliates must be formalized in intercompany agreements to make them legally binding, comply with transfer pricing laws, and ensure an appropriate line of defense against the challenges of tax authorities. If you don`t, your business runs serious and unnecessary risks.

ICAs are similar to commercial agreements between independent parties, although companies in a group will strive to keep the ICA much shorter and lighter to ensure that stakeholders in incoming and outgoing companies spend little time complying with or interpreting the terms. Business-to-business agreements play a crucial role in demonstrating and defending the Group`s transfer pricing policy. We discuss the role of business-to-business agreements, which typically formalize transfer pricing agreements in a binding and legally enforceable contract. In general, an agreement (including intercompany agreements) establishes the legally binding relationship between the parties by providing a written document setting out the exceptional understanding of the business relationship, the allocation of risks and the terms and obligations underlying the covered transaction. At the same time, it reflects the contractual basis of the underlying intercompany activity, determines the type of goods and services to be provided, the conditions of remuneration and the termination clauses. If you have any questions about intercompany agreements or other commercial agreements, please contact the lawyers listed below. ICAs should reflect the actual conduct of the parties. If you need fewer units than you have contractually agreed, if you no longer require contractual administrative services, if you have stopped performing under the contract, or if the operational realities of your relationship with the affiliate have changed, immediately update the CIA to reflect those realities and, if possible, even plan ahead. At the time of writing, many transactions have been impacted by COVID-19 and companies are reorganizing or reorganizing different parts of their operations to adapt to new market realities. ICAs must therefore be adapted to reflect these new operational realities. The importance of regular review cannot be underestimated. Taxpayers should regularly check whether business-to-business agreements are up to date and reflect the real situation.

It is necessary to ensure that intra-group agreements correspond to reality, respect transfer pricing documentation and market standards. Intercompany agreements are contracts between two or more companies or divisions belonging to the same parent company.3 min read ICAs are governed differently in each jurisdiction. In some jurisdictions, these agreements must be in writing so that the government and tax authorities do not recognize them and companies lose all the benefits that these jurisdictions offer to related parties. In many jurisdictions, these authorities will establish a relationship with a related party or related party transactions (by .B. in the United States). ICAs are often regulated by the financial or tax authorities of one jurisdiction, but are also regulated by other authorities (see federal acquisition regulations (“FAR”) and Defense FAR Supplement (“DFARS”) in the United States). In practice, companies often neglect intra-group contractual obligations. And even when business-to-business agreements are concluded, they are often poorly formulated, outdated and do not reflect the economic reality of the controlled transactions. The absence of (quality) business-to-business agreements can pose a risk for a variety of reasons. These are the three most important: in a transfer pricing audit, tax authorities usually request transfer pricing documents, including all relevant intercompany agreements as a starting point. This is to be expected and, therefore, the absence of intercompany agreements is considered an immediate non-compliance and increases the likelihood of further investigations by tax authorities.

Through a rigorous intercompany agreement management process, taxpayers can effectively mitigate tax audit risks with relatively little time and cost. The OECD states in its Transfer Pricing Guidelines that written agreements alone should not determine the economic outcome – the actual conduct of the parties to the transaction should. Many jurisdictions have also amended their transfer pricing laws in recent years, requiring that the legal form of intercompany transactions be examined in relation to their actual substance. Intercompany agreements should provide the parties with sufficient flexibility to deal with unforeseen changes. Taxpayers should consider, among other things, the following aspects: The requirements for an appropriate intercompany agreement naturally depend on the nature of the underlying transaction. Effective management of intercompany agreements should take into account the following best practices: Unlike transaction agreements between independent parties, tax authorities in most countries will review ICAs to ensure that all transaction conditions under the ICA are similar to those between independent parties acting on market terms. .