Intercompany agreements and transfer pricing documentation

Two documents, two purposes

An intercompany agreement is a legal contract between related entities. It allocates functions, risks, assets, IP and payment between them, and it is what the directors of each company approve. Transfer pricing documentation (a master file, local files and, for larger groups, country-by-country reporting under the OECD framework adopted in all ten LegalMatrix jurisdictions) is a tax file: it describes the group, the transactions and the analysis supporting the arm's length price. The agreement is the fact; the documentation describes and justifies it. Without a signed agreement, the documentation describes an arrangement that does not legally exist, and without the documentation, the agreement states a price nobody can defend. LegalMatrix prepares the agreement; the group's tax adviser prepares the file and sets the price.

The agreements most groups need

• Management or shared services agreement: headquarters provides finance, HR, IT, legal and marketing support to subsidiaries at cost plus a mark-up.
• Intercompany licence: the IP-holding company licenses brands, software or know-how to operating companies for a royalty.
• Contract manufacturing or distribution agreement: an operating company manufactures or sells for a principal entity on a limited-risk basis.
• Secondment agreement: employees work for another group company while remaining employed at home.
• Cost contribution or development agreement: entities share the cost and ownership of developing IP.
• Intercompany loan or cash pooling agreement: financing between entities at an arm's length rate.

The LegalMatrix intercompany services agreement, IP assignment and licence, and secondment agreement products cover the first, second and fourth; loans and cost contribution agreements are quoted on request.

What the agreement must say

The agreement should describe the services or rights specifically enough that a tax auditor can match them to invoices and to the functional analysis in the file; vague 'management services' clauses are the first thing challenged. It should state the pricing method (cost plus, fixed fee, allocation key, royalty rate) and leave the figure in a schedule that can be updated without re-signing the agreement. It should allocate the costs included in the base, set invoicing and true-up mechanics, require the provider to keep time or cost records, address withholding tax and gross-up, and provide for annual review. Liability and termination provisions should be those unrelated parties would accept; terms that are too favourable to one side are themselves evidence that the arrangement is not arm's length.

Corporate approvals and conflicts

Directors of each entity owe duties to that entity, not to the group. A subsidiary's board should approve the agreement on the basis that the services are needed and the price is reasonable, and the minutes should say so. Where a director sits on both boards, the conflict should be declared under the Companies Act of each jurisdiction and the approval recorded. The LegalMatrix board and shareholder resolutions pack includes intercompany approval resolutions for this purpose.

Secondees and permanent establishment

Staff working for another group company are the most common gap. If headquarters employees spend months in a subsidiary's country negotiating contracts in the parent's name, the parent may acquire a taxable permanent establishment there; if a subsidiary pays a seconded employee's salary without an agreement, the recharge is undocumented and the deduction is at risk. A secondment agreement between the entities, a letter to the employee and a recharge under the services agreement close the gap. The agreement should make clear which entity directs the work and bears the risk, because that allocation is what the transfer pricing analysis will rely on. The LegalMatrix secondment agreement is drafted to pair with the intercompany services agreement for this reason.

Common mistakes

• Agreements signed years after the services began, with no record of what was provided in between; back-dating is not a cure and is itself a problem.
• One global template with the same mark-up for every service, when the file applies different methods to different services.
• Invoices that do not reference the agreement or that describe services the agreement does not cover.
• Royalties paid under an IP licence from an entity that does not own the IP, because the assignment into the IP holder was never completed or recorded.
• No board approval in the subsidiary, leaving the directors exposed and the agreement open to challenge by a later shareholder or liquidator.
• Price schedules never updated after the first year, so the agreement and the file drift apart.

Jurisdiction points

Most jurisdictions require contemporaneous documentation above thresholds, with penalties for failure: Singapore (IRAS transfer pricing documentation rules), Japan (local file requirements under the Act on Special Measures Concerning Taxation), Australia (ATO local and master file obligations for significant global entities), the United Kingdom (HMRC transfer pricing records requirements for large groups), Canada (contemporaneous documentation under section 247 of the Income Tax Act), the United States (section 482 and section 6662 documentation), Taiwan (transfer pricing report requirements), Malta (transfer pricing rules effective from 2024), Hong Kong (Inland Revenue Ordinance transfer pricing provisions and documentation thresholds) and New Zealand (Inland Revenue transfer pricing guidance). Thresholds and deadlines differ and change; check the authority. Withholding tax on service fees and royalties, permanent establishment risk from seconded staff and VAT or GST on intercompany charges are the other recurring questions, all for the tax adviser.

Sequence for a group

• Map the actual flows: who does what for whom, where the people and IP sit.
• Agree the pricing methods with the tax adviser.
• Prepare and sign the intercompany agreements with board approvals in each entity.
• Issue invoices under the agreements and keep the cost records they require.
• Prepare the transfer pricing file describing the agreements and the analysis.
• Review annually: update the price schedule, re-approve, refresh the file.

GoGoTrust diarises the annual review for groups it administers and files the agreements in each entity's minute book.