Missing or Inadequate Intercompany Agreements

Intercompany agreements provide an important framework for related-party transactions.

They should clearly describe:

• The services or goods being provided.
• The responsibilities of each company.
• The allocation of risks.
• The ownership and use of intangible property.
• The pricing or remuneration mechanism.
• The payment terms.
• The circumstances under which the arrangement may be changed.

However, having an agreement alone does not guarantee that the IRS will accept the transfer pricing position. The agreement should be consistent with the parties’ actual conduct and the transaction’s economic substance.

For example, an agreement may describe a company as a limited-risk distributor, while the company’s actual operations show that it assumes significant inventory, market, or product risks. In that situation, the agreement may not fully support the transfer pricing position.

Companies should also avoid entering into agreements after transactions have already occurred. Agreements and supporting documentation should be prepared and maintained as part of the normal business process.