What Is Intercompany Service Agreement

Intercompany agreements are agreements between two companies belonging to the same company. As a rule, these are two departments under the same company. This Agreement defines how intercompany sales or transfers of goods, services or deadlines are handled. 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. It is necessary to ensure that intra-group agreements correspond to reality, respect transfer pricing documentation and market standards. In a transfer pricing audit, tax authorities generally request transfer pricing documentation, 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. In most cases, it is advisable to have a written ICA. You can achieve this by having considerations in your agreement that provide the context for the ICA transaction, by having a clear and specific statement about the proposed transaction and the results, and by aligning your actions with your ICA and the transfer pricing policies that may apply in your group. For U.S. companies in particular, an ICA should have clear terms for payment, quantity, warranties, modifications and updates, duration, and termination.

You should keep all your ICAs together, up-to-date and ready for a tax inspection or other government inspection. 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. It must be assumed that the business environment is often not static and that its development may force the parties to modify or terminate the intercompany agreement. Therefore, a well-structured agreement should consider a termination clause for such situations. ICAs are regulated 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 consider a relationship with a related party or related party transactions (for example. 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).

The following example shows what can happen without transfer pricing agreements: 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 main ones: an intercompany agreement (“ICA”) is usually a commercial agreement for services, the sale of goods, financing or intangible assets concluded between companies related by ownership, under common control or part of the same group of companies. Companies have many reasons, including operational, strategic, tax and legal reasons, to join ICAs. Intercompany agreements may cover various controlled transactions. Below we give an overview of the most common: The requirements of a suitable intercompany agreement naturally depend on the type of underlying transaction. Effective management of intercompany agreements should take into account the following best practices: Intercompany agreements are contracts concluded between two or more companies or divisions belonging to the same parent company. It is a contract that concerns internal transactions of sales or transfers of goods and services between companies. The purpose of an intercompany agreement is to deal with certain factors of the parent company in cooperation with both business units of the same company.

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. 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. 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. 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 significance only becomes monumental for financial institutions and multinationals.

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