Intercompany Agreements: Easy to Forget, Costly to Ignore (Part I)

Today, we want to talk about a recurring theme we are increasingly encountering in Startups and companies with a certain international presence: Intercompany Agreements (or rather, the lack of them).

In the first weeks of onboarding, when we carry out a small legal and fiscal due diligence on our clients, we almost always find the same problems and one that is repeated very often is not having a defined transfer pricing system with a written policy that establishes a definition of methods, margins and surcharges.

Usually, TravelTech companies, in their internalisation process, look for the creation of structures for three main reasons:

  1. Legal – they may need to obtain a local licence to operate.
  2. Fiscal – they may look for countries where corporate tax is lower, or perhaps the volume of transactions in that country is so high that it pays to set up an entity to offset input VAT.
  3. Commercial – either to have a local presence, to get better rates from suppliers or customers in that country, or to improve their image to investors.

Although this internalisation process is necessary, the administrative part and what it entails at a legal and fiscal level is often forgotten.

But let’s start at the beginning. What is an Intercompany Agreement? Intercompany agreements (or Agreements) are contracts between associated companies within the same group. These agreements set out the terms and conditions of controlled transactions, such as providing services or supplying goods between these entities. These agreements not only formalise transfer pricing arrangements in a legally binding way but also serve as evidence to tax authorities and stakeholders, demonstrating the implementation of transfer pricing policies.

What if I don’t have them? If the agreements are not kept up to date, are not well drafted, or do not match the reality of the operations carried out by the company, they can open the door to questioning by tax authorities, which could lead to audits and fines.

In addition, there is the obligation to document transactions with the corresponding “master file” or “local file” to support the valuation method used. If the tax authority of a given country does not agree with the calculated transfer price, a profit adjustment will have to be made to the companies. If the tax authority of the other country does not accept this adjustment, double taxation will occur.

In addition to paying more tax, these discussions with the tax authorities consume staff resources and administrative costs. If you are inspected, it is up to you to prove that your transfer prices are correctly assessed and calculated. That means the ball is in your court, and it is often easier to have everything in place from the start than to have to defend yourself against what the tax authorities say later.

This is why business-to-business agreements are key to:

  • Ensure that what you do with related companies is legally sound.
  • Make the terms and conditions clear.
  • Who bears the risks.
  • How prices are set, including any adjustments or offsets that may be made after year-end.
  • Complying with the rules on how these transfer prices should be documented.

In the next post, we will explain the types of intercompany agreements, what to consider when drafting them, and how they should be implemented.