Intercompany Agreements

The tax authorities are not convinced that Pierre Plastic complies with transfer pricing laws. It intends to examine (i) whether the allocation of risks, assets and functions on which transfer pricing agreements were based is consistent with actual agreements and (ii) whether the associated companies have agreed to the transfer pricing agreements. Without intercompany agreements, Pjotr Plastic must now provide further evidence and convince the tax authorities that its transfer pricing position is in fact what it claims – potentially a lengthy and costly discussion. It could have been avoided… Intercompany agreements have different levels of specificity. However, these contracts are often implicit in “business as usual” and may not involve fundamental interruptions. For example, who is responsible if suppliers cannot work due to government shutdowns? What will happen to unsold inventory if customers are not allowed to enter stores? What happens if there is a large unproductive debt? Signed copies of all agreements are stored in a central and ardent repository, making it easier to establish agreements for documentation purposes. Finally, some intercompany agreements are more explicit than others, particularly with regard to payment terms. Whether an existing agreement is amended or a new agreement is concluded, if it indicates that the allowance is based on a fixed mark-up or a fixed margin, this could be a good time to ascertain whether a more general formulation, such as “a price of arm length,” would be more appropriate.

Companies are not able to take advantage of intercompany sales. It is therefore expected that the companies or departments of a parent company will pay for intercompany transactions by a specific method. The purpose of the intercompany agreements is to define how transfers take place and to determine, on the basis of financial results, what measures are needed for all parties involved. Intercompany agreements are legal agreements that define the conditions under which services, products and financial support are provided between related parties.

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