Intercompany Agreement

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Intercompany Agreement

Intercompany agreements (ICAs) are used when two companies belonging to the same parent company transact internally or transfer goods and services between themselves. They help the subsidiaries cooperate while dealing with certain factors of the parent company. Often, the parties to the contract are two divisions of the same corporation. ICAs have very wide scope of application such as transactions between head offices and subsidiary branches, sharing of costs and revenue, to name a few. ICAs are considered a basic element of Transfer Pricing compliance. These contracts are so significant because a tax audit or regulatory body may ask a group to produce them in order to verify that they are complying with the standards of taxation.

When Do You Need Intercompany Agreements?

Since companies do not profit from internal transactions, it becomes necessary for businesses to define and document any internal transactions that may take place. The purpose of an intercompany agreement is to document the transactions between divisions or subsidiaries of a company in order to allow the parent company or organization to take decisions based on the financial results that are produced. It also helps in compliance with laws and regulations such as Section 482 of the IRS Tax Code and the OECD-BEPS, and allocation of risk and responsibilities.

An ICA would be required if:

  1. Two or more companies under a single parent corporation are engaging in a transaction or transfer of goods and services between each other.
  2. Two or more divisions of a single company are transacting between each other.

Inclusions in Intercompany Agreements

Intercompany agreements should include the effective date of the agreement, the names and descriptions of the parties to the contract, the relationship between the two parties and that of the parent organization. Other important terms that should be included in order to satisfy the requirements of Section 482 of the IRS Tax Code and the OECD’s transfer pricing guidelines include the amount and mode of payment of consideration, volume of sales and purchases, the scope of warranties, provisions for revisions and amendments, termination and re-negotiation rights and the establishment of the on-going business relationship between the buyer and the seller. It is crucial to have a well-framed contract that is adequately detailed so that the business can make it through the IRS or other authority’s scrutiny.

How to Draft Intercompany Agreements

Procedure to draft intercompany agreements:

  1. Mention the effective date of the agreement.
  2. Establish the contracting parties and their relationship as a buyer-seller.
  3. Establish that the contracting parties are subsidiaries or divisions of a single parent company.
  4. Establish the governing jurisdiction.
  5. Make provisions that expressly state the scope of warranties.
  6. Make provisions for revisions, amendments, termination and re-negotiation.
  7. Mention the volume of sales and purchases.
  8. The terms and mode of payment of consideration.
  9. Include any other terms that may be required by state, federal or international legislations and regulations.
  10. Ensure that the agreement is in consonance with Section 482 of the IRS Tax Code, OECD-BEPS and other local laws and regulations.
  11. Have the representatives of the companies and their witnesses sign the agreement

It is important to ensure that the agreement conveys the exact nature of the transaction, the intent to enter into a contract and compliance with laws and regulations.

Benefits of Intercompany Agreements

  1. Allows compliance with Section 482 of the IRS Tax Code, OECD-BEPS, and other local, federal or international laws and regulations.
  2. It allows the parent organization to make analyses and take appropriate actions concerning the subsidiaries or the whole company as a whole.
  3. It helps in the ascertaining and allocation of risks, liabilities, and responsibilities to the respective divisions or subsidiaries of the parent company.
  4. It helps in the establishment of the rights to intellectual property such as patents, trademarks and copyrights.
  5. Facilitates a hassle-free tax audit process.

Types of Intercompany Agreements

There are several types of intercompany agreements such as:

  1. Intercompany debt agreements: This is an arrangement whereby two or more subsidiary companies can loan each other funds.
  2. Intercompany lease agreements: This facilitates the lease of a collateral between two or more subsidiaries.
  3. Intercompany license agreements: An agreement whereby one subsidiary can license the property of another for its own use.

Key Terms/Clauses in Intercompany Agreements

Important clauses that need to be included in the agreement include:

  1. Buyer-Seller Relationship: The agreement should acknowledge the relationship between the buyer and seller and that of the parent company to the contracting subsidiaries.
  2. Scope of services: This clause lays down what services the seller will render to the buyer including relevant details such as the timeframe within which the services will be rendered and the resources that are expected to be expended during that timeframe.
  3. Scope of warranties: This states the extent of warranties and to what extent the liabilities are limited under this clause.
  4. Termination: This explains the circumstances under which the contract can be terminated and how this will be dealt with.
  5. Default: This clause determines what would constitute an event of default, non-performance, or breach of contract.
  6. Dispute Resolution: This clause specifies how any disputes that arise will be resolved. It can include provisions for arbitration and other alternative dispute resolution methods.

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