Transfer Pricing Insights: A Deep Dive into Inter-Company Agreements (ICAs)

Inter-company agreements (ICAs) serve as crucial legal documents governing transactions within Multinational Enterprise (MNE) groups. These agreements delineate rights and obligations for various intra-group arrangements of the MNE, including the exchange of goods, services, loans, and intellectual property.

Before delving into the significance of ICAs in the broader tax andlegal landscape, it is essential to dive into the roots and obtain an understanding of their fundamental nature. Unlike Transfer Pricing (TP) policies, which establish pricing guidelines for inter-company transactions, ICAs provide the contractual framework for implementing these policies. While TP policies ensure transactions take place at arm’s length, ICAs serve as the practical application of these principles, guiding the parties involved in adhering to tax and regulatory requirements and mitigating potential disputes.

With this understanding, let’s explore the critical checkpoints for drafting ICAs and delve into best practices for their effective implementation within MNE groups.

A. Important Checkpoints while Drafting/Reviewing an ICA

ICAs are not standardized and vary based on the underlying inter-company transactions, roles and responsibilities, and various key terms. Providing general guidance on how ICAs are to be drafted may not encompass all exhaustive scenarios. Therefore, it is prudent to highlight key checkpoints or questions that must be addressed during the drafting of any ICA. With this context in mind, the key checkpoints are encapsulated as follows:

Context:

Do the ICAs accurately delineate the actual inter-company transaction that is taking place?

Transparency:

Do the ICAs clearly outline the relevant background and roles & responsibilities of the parties to the agreement?

Timelines:

Is the timing of drafting and execution of ICAs, including tenure and termination clauses, appropriately documented?

Specificity:

Is the description and scope of ICAs taken care of as it is the heart of the ICA?

Benchmarks:

Are pricing policies aligned with TP policies, benchmarking studies, comparability analyses, and litigation experience?

Credit Evaluation:

Is the credit period evaluated to avoid the risk of deemed loans and imputed interest from delayed payments

Intangible Rights:

In alignment with the roles & responsibilities of the parties involved, are the relative risks properly documented and highlighted?

Critical Conditions:

Given recent experiences like the COVID-19 pandemic, is including a force majeure clause in ICAs essential for unforeseen circumstances?

TP adjustments:

Is there adequate coverage for true-up/true-down adjustments to ensure adherence to TP policy during periodic reviews or prior to financial closures?

B. Best Practices for ICAs

01 Clarity

ICAs must be clear, unambiguous, legally binding, and duly executed (signed and dated) by the authorized signatories of the parties to the agreement.

02 Review

ICAs should undergo regular review and updates to stay aligned with changing business practices, pricing policies, roles, responsibilities, and tax regulations.

03 Support

ICAs must align with MNEs’ transfer pricing policies and corporate tax strategies, covering indirect taxes (VAT/GST, customs) and key considerations like WHT, GAAR, POEM, and PE risks.

04 Controls

MNEs should ensure dedicated personnel manage ICAs, conduct regular audits for TP compliance, prevent adjustments without ICAs, and review ICAs before submission to tax authorities.

05 Expertise

Drafting ICAs requires expertise in the TP life cycle—planning, monitoring, compliance, and controversy management—along with tax, regulatory insights, and thorough legal review. Proper care is needed in choosing the preparer.

06 Explanation

The professional drafting ICAs needs thorough checklists, while MNE teams must clearly explain business objectives, roles, and key considerations.

07 Simplicity

Simplicity is key when drafting ICAs. Clear, straightforward agreements help avoid complexity and misinterpretation

08 3ʳᵈ Party ICA:

MNEs should ensure dedicated personnel manage ICAs, conduct regular audits for TP compliance, prevent adjustments without ICAs, and review ICAs before submission to tax authorities.

C. Key Take Aways for ICAs

• Alignment Importance:

Firstly, if the ICAs are not in place or not aligned to support the TP policies and tax positions of the MNEs, tax authorities may be compelled to draw their own conclusions regarding the nature and key terms of the inter-company transactions.

• Strategic Tool:

Further, ICAs should not be perceived merely as supporting TP documentation to be filed with tax authorities upon request but must be considered integral tax strategic tool to guide and monitor intra-company transactions and to support and defend the TP and tax positions of the MNEs.

• Evidential Value:

ICAs are vital evidence for determining transfer pricing, corporate tax, withholding tax, permanent establishment, place of effective management, GAAR, indirect taxes (VAT/GST, customs), statutory audit documentation, and cross-border regulations.

• Risk Awareness:

It is crucial to bear in mind that there have been numerous instances of tax rulings/decisions across major TP jurisdictions wherein defects in the ICAs have led to significant adverse TP consequences for taxpayers.

• Proactive Approach:

In conclusion, well-documented ICAs are essential for TP monitoring, compliance, and controversy management, helping MNEs avoid fines, save time during audits, and mitigate reputational damage.