Intercompany Agreement

A parent company provides finance staff and software support to a subsidiary, and an intercompany agreement records which services are provided, who pays, how charges are calculated and when disputes are resolved. Without it, invoices can look arbitrary.

OECD transfer-pricing guidance addresses the arm's length principle for transactions between associated enterprises, and the actual analysis depends on functions, assets, risks and local adoption of the guidance. The US Internal Revenue Service notes that transfer-pricing documentation must be reasonable and supported, so simply having documents does not automatically protect against a challenge, and its rules are US-specific, not a global template.

Identify each legal party, because a brand name or business unit is not necessarily a contracting company, and use correct registered names and authorised signatories. Describe the transaction specifically, since "management services" can be too vague: specify deliverables, service levels, who performs the work and which entity receives a benefit.

Set the term, because effective date, renewal, termination and transition duties matter, and a document signed years after the activity began may not accurately explain the historic period. Specify consideration, which may be fixed, cost-plus, usage-based or interest-bearing, and define the calculation, currency, payment timing and invoicing evidence.

Document cost allocation too, since shared technology or staff costs need a sensible allocation key and source data, and a group-wide headcount ratio may not fit every service. Address risk by stating who bears losses, maintains insurance, owns data and handles claims where relevant, because a parent guaranteeing performance is different from merely coordinating work.

If one entity develops software used by another, licensing, ownership and updates should be explicit, and common ownership of the group does not settle these questions. An internal loan should state principal, interest, maturity, repayment and default treatment, and tax and corporate-law restrictions may apply.

Review indirect tax and withholding, since invoices between related entities can still trigger VAT, GST or withholding obligations under applicable law. Apply transfer-pricing analysis separately, because a contract states terms but actual conduct and economic evidence matter, and a cost-plus rate selected without analysis is not automatically arm's length; an illustrative service charge of $100,000 of documented eligible cost plus an assumed 5% markup gives $105,000, where the 5% is fictional and not an approved or safe-harbour rate.

Reconcile charges against time records, allocation data and service delivery, and correct or explain differences between signed terms and practice. Control amendments, because new services, entities or currencies may need an update and a generic agreement should not silently cover transactions it never describes.

Coordinate board, treasury, legal and tax approvals depending on amount and jurisdiction, since related-party conflicts can require special governance, keep signed versions, schedules, calculations and contemporaneous support because a signed PDF without workpapers may be insufficient for an audit, and respect local differences such as corporate benefit, exchange controls, sanctions and licensing rules, as there is no universal agreement form. Group managers can disagree about a charge despite shared ownership, so identify escalation, records, governing law and a forum for resolution, and remember that a legitimate invoice may stay unpaid if cash is trapped or approvals fail, so receivables and payables must reflect the actual balance until settled.