Multi-tier Trading agreements and Intercompany

To operate effectively in multiple tax jurisdictions, intercompany activity needs to be operated under legally binding agreements. These specify how two companies will trade with each other, and how the transfer price will be determined. As the number of legal entities within an organization grows, the number of trading relationships, and thus trading agreements grows exponentially.

To offset this impact, many corporations organize their legal entities into groups, with each group being ‘owned’ by a parent company. Usually direct intercompany activity is limited to entities within the same group. Intercompany between groups usually runs indirectly through the parent companies.

This grouping into hierarchies has the benefit of reducing the number of trading relationships, and thus reducing the number of trading agreements, but can dramatically increase the number of intercompany transactions needed overall. Therefore, this technique only has value to the organization if it can be fully automated.

As these hierarchies are core to the intercompany process, software solutions need to provide clear visibility, and the flexibility to create both single and multi-tier trading agreements. Flexibility in how an intercompany route is selected, and how the accounting is created from it also provides a major challenge.

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