Transfer Pricing Compliance and the importance of Intercompany Agreements
Multinational Enterprises (MNEs) often have a clearly defined transfer pricing (TP) policy that includes the definition of methods, mark-ups and margins. However, they need to demonstrate their TP outcomes are in line with their TP policy. Companies also need to prove they are managing their transfer prices appropriately.
Intercompany agreements (ICAs) are critical to this process. Transfer pricing advisers in Dubai can assist you in creating and managing your ICAs. In this blog, we will provide you with a brief explanation of the importance of ICAs:
What are intercompany agreements?
An ICA is a legal agreement between related parties that defines the terms of intra-group transactions such as those relating to goods, services, intellectual property and loans. Intercompany transactions executed without a proper ICA or outdated contractual agreements can be easily challenged by tax authorities. This explains why ICAs are important to the process of transfer pricing compliance in the UAE.
Differences between ICAs and normal agreements
ICAs are not the same as other third-party agreements or commercial contracts. An ICA is signed by two entities that are part of the same MNE group. These entities, known as Associated Enterprises (AEs), are often located in different tax jurisdictions despite being part of the same MNE group.
Moreover, the ICAS often govern the terms and conditions of cross-border transactions between these AEs. A third-party agreement is signed between two independent enterprises, created with the aim of protecting their own interest. Transfer pricing consultants in Dubai can help you create effective ICAs.
Why are intercompany agreements needed?
ICAs are critical to transfer pricing compliance in the UAE as they are one of the key requirements to evidence the legal substance of intra-group transactions for TP. Companies need to ensure the agreements are not missing and make sure the ICAs are in line with TP or tax filings.
If not, the UAE Federal Tax Authority (FTA) or other relevant tax administrations may form their conclusions regarding the nature of the intercompany transactions. This may expose the MNE group to tax audits, fines, penalties and reputational damage. These consequences can be avoided by hiring the best transfer pricing advisers in Dubai, UAE.
What are key requirements of intercompany agreements?
While drafting an ICA, companies must ensure the agreement meets the following qualities and requirements:
- Must be clearly written without any ambiguity
- Legally binding and duly executed (signed and dated) by the relevant parties
- Must be in line with the group’s actual business operations, and the way that it uses the intellectual property, assets and finance
- Must reflect arrangements that the directors of each participating AE can properly approve as being in the best interest of the company
Recommendations to Avoid Defective ICAs
MNEs need to implement specific controls to avoid the risk of defective ICAs. Some of these appropriate controls recommended by the best transfer pricing consultants in Dubai include:
- The roles and responsibilities related to maintaining and updating the ICAs must be properly documented
- The process for maintaining & updating the ICAs must be documented
- A central archive must be created and maintained for signed and dated ICAs
- Perform mock audits to ensure the existing ICAs adhere to your transfer pricing policy
- Annually/periodically review the implementation of the TP policy before the start of each financial period
- Review the implementation of TP policies (annually/periodically) before filing the after-the-event tax returns TP documentation
- Review any change in the group that may require to be reflected in the updated ICA
Examples of ICA ‘red flags’ MNEs must be Wary Of
While drafting an ICA, companies must try to avoid certain red flags. Consultants providing ICA services in Dubai can help you avoid some of the red flags including:
- Preparing TP policies without having reference to the documented legal terms
- Failing to review and update ICAs for a number of years
- Drafting ICAs through inexperienced and unqualified individuals
- Long and complex ICAs
- ICAs lacking central oversight
When should you Draft an ICA?
ICA services providers in Dubai recommend companies prepare the ICAs before the commencement of the group’s financial year. ICAs prepared afterwards are unlikely to be effective.
Tax Gian Provides the Best ICA Services in Dubai, UAE
The path to robust transfer pricing compliance in the UAE starts with an effectively drafted ICA. MNEs must know that ICAs are not just documents but are strategic assets that safeguard the group against tax risks. However, entrusting your ICA requirements in the UAE with inexperienced professionals can derail your entire TP arrangements, inviting unnecessary audits and prolonged litigation.
Tax Gian, a brand of Jitendra Tax Consultants (JTC), can help you by providing the best ICA services in Dubai. We are one of the top transfer pricing advisers in Dubai, comprising a team of qualified tax experts. Tax Gian and its associate Jitendra Chartered Accountants (JCA) have been revolutionizing the UAE regulatory compliance landscape for over two decades. Call us today to avail yourself of comprehensive transfer pricing consulting services in the UAE.
