10 Signs Your Intercompany Agreement Is Stale
“Are your intercompany agreements stale?”
This may not be the sort of question that keeps you up at night. But during documentation season, it should be on the minds of anyone preparing US principal documentation or OECD Local Files. One challenge is that it isn’t always obvious what to look for.
There are plenty of technical ways to evaluate whether an intercompany agreement (ICA) aligns with prevailing transfer pricing practice or adroitly delineates the arrangement. But some warning signs are superficial — right there in the contract — and they practically jump right out at you if you know where to look.
And since a tax authority is likely to disregard your ICA if the actual business conduct does not align with the contractual language, there could be a lot at stake.
So, without further ado: “What’s in your ICA?”
The following are some signs that your ICA may have gone a bit stale:
1. The Same Person has Signed for All Parties
If the same executive’s name fills every signature block, that’s really not optimal. Independent execution matters, as does the location of executive functions. If there was no voice in the room present to prevent this from happening, your ICA probably has a host of curious sections in need of attention.
2. Nobody Who Drafted It Is Still Around
Companies evolve, and so do the people who administer transfer pricing policies. If no one in the tax department even remembers why – or for that matter when – an agreement was drafted the way it was, chances are high that key sections have been forgotten or reinterpreted over time. Equally, the personnel operationally responsible and involved in the commercial activities subject of the ICA may no longer be around, to similar effect. In these ways, an ICA can go stale.
Too often you’ll hear, “But, our agreement says…” as if that itself proves the fact. If those core assumptions haven’t been re-evaluated and vetted in a long time, you may be relying on an outdated interpretation.
3. Dozens of Identical, Omnibus “Services Agreements”
If half the documents in your ICA library boast the same very basic title — Services Agreement — you are probably using highly over-generalized ICA templates. Of course, templates themselves are not bad…they are essential when producing large numbers of agreements.
However, today’s transfer pricing agreements generally feature greater specificity associated with the transaction and the roles and responsibilities of both parties. It’s increasingly difficult to capture many different types of related party activities under a single ICA.
4. Incomplete or Missing Exhibits
Many ICAs rely on exhibits to define the transaction-specific details: definitions of services, sales territories, covered products and corresponding discount rates, the transfer pricing policy rate, etc. Despite their importance, a surprising number of ICA exhibits out there feature the heading presiding over a blank page. Or, key exhibits may be missing entirely. It’s easy to imagine that an auditor would view the receipt of such an ICA as an invitation to carefully scrutinize the actual, observable intercompany behavior and perhaps fill in the blanks with their own interpretation.
5. References to LIBOR
If your ICAs still peg interest to LIBOR, you’re working with an artifact. LIBOR rates were discontinued between March 2023 and September 2024. Perhaps a Treasury policy addresses the adoption of SOFR or another benchmark, but is that policy formally documented, and does it clearly apply to each transaction it covers?
6. No Clear Effective Date
An ICA without an effective date is a red flag. It’s simple reality that the execution of ICAs often trails the inception of a business activity (especially for various people functions and ad hoc trading in the era of supply chain disruption), but leaving open the effective date when memorializing a transaction is generally not the best solution.
7. “Arm’s-Length Markup or Margin” Clauses
Rather than specifying a specific profitability target, or range, some ICAs require only an ‘Arm’s Length’ result to be achieved. These intentionally ambiguous provisions often exist so companies can maintain flexibility. While that sounds practical, it can also encourage neglect. And over time, multiple episodes of pushing the boundaries of this flexibility can result in misalignment.
8. Borrowed From a Commercial Contract
Repurposing a third-party contract for a like transaction may be viewed as a clever alternative to drafting a bespoke ICA. This can occur in cases of relatively complex transactional models for which there are parallel in-sourced and out-sourced functions, usually in different markets. But doing so often overcomplicates the arrangement. It also becomes more likely to mischaracterize any inherent differences in the way related parties interact vs. third parties.
There are doubtless some positive exceptions to be found. But more often, it will likely to be easier and cleaner to start over to better reflect the economic circumstances of the ICA.
9. Still in Draft
If “Draft” is stamped in the header, if track changes are visible, or if the agreement is unsigned — especially if there is a comment querying who should sign…a personal favorite! — you may have more of a placeholder than an ICA.
10. Hang on…What Agreement?
The most obvious sign: there isn’t one. Borrowing an ICA from another entity with a similar transaction is not really a reliable substitute. Having nothing is, well… having nothing.
This is neither a Top 10 List, nor the only possible signs that your once freshly-baked ICA may be ready to be cubed on a baking sheet to make croutons. With that in mind, there is a bonus, eleventh sign for this Margin Note.
Special Bonus Sign: Times New Roman
Perhaps a controversial sentiment, but Times New Roman itself is stale. Yes, it’s popular among attorneys, but it was designed as a font used to squeeze a lot of text into a slender column of newsprint. Also, an ICA is a record for the company, and the companies using Times New Roman as their core font are few and far between. (Even the volume of filed 10-K forms in TNR are dropping.)
ICAs drafted in Times New Roman are in that font for many of the wrong reasons. Tradition, habit, the way attorneys have always done it. These arguments are out of step with the ever-changing character and behaviors of robust international commerce.
“The text of every booklet-format document, including any appendix thereto, shall be typeset in Century family (e.g., Century Expanded, New Century Schoolbook, or Century Schoolbook) 12-point type with 2-point or more leading between lines. Quotations in excess of 50 words shall be indented. The typeface of footnotes shall be 10-point or larger with 2-point or more leading between lines.”
-- Excerpted from Rule 33. 1(b) ‘Document Preparation: Booklet Format’ of the Rules of the Supreme Court of the United States…albeit, without the requisite indenting.
Instead, why not present your company’s ICAs in the same font that corporate employs for all its formal communications? By executing ICAs in the current, branded corporate font, it’s immediately visible in which ‘era’ the agreement went in force.
And if you have ever had a dozen pdfs of ICAs open on your laptop and monitors, or printed versions spread on your desk, this provides a profoundly useful visual cue.
Reflection from the Margins
At the end of the day, an ICA doesn’t have to be flashy or perfect. But it does need to adequately reflect the business as it is today. If even a couple of these signs sound familiar, it may be time for a closer look — before someone unfriendly beats you to it.
At Evident Solutions, we help clients assess whether their ICAs are still fit for purpose. Our approach combines technical rigor with practical, cost-effective guidance to align contracts with current operations. Whether you need a full refresh or just a light touch to amend terms, we’ll make sure your ICAs are suitable for more than croutons — they’ll be durable tools for your evolving business.
