An intercompany agreement is the written contract between two companies in the same group for goods, services, intangibles or financing. In transfer pricing, it does two jobs: it records what the parties agreed, and it shows SARS how the price was meant to be set. A missing or outdated agreement is one of the most common, and most avoidable, weaknesses in a South African transfer pricing file.
Key points
- SARS’s transfer pricing record-keeping rules require copies of the contracts behind connected-party transactions.
- The OECD approach starts with the written terms but looks at actual conduct where the two differ.
- Every agreement should describe what is supplied, the pricing method, risk allocation and adjustment mechanisms.
- Agreements must stay consistent with your transfer pricing policy, ITR14 disclosures and exchange control approvals.
Why intercompany agreements matter
Under SARS Public Notice 1334, taxpayers that meet the documentation threshold must keep copies of the contracts and agreements related to their potentially affected transactions. Even below the threshold, an agreement is the simplest evidence of what was intended.
The OECD Transfer Pricing Guidelines ask tax authorities to “accurately delineate” each transaction. They start with the contract, then compare it with how the parties actually behave. Where the conduct differs, the conduct generally wins. So the agreement must reflect reality: a document that says the South African company is a low-risk distributor will not help if it actually sets prices, holds stock risk and runs its own marketing.
Common types of intercompany agreements
- Services and management fee agreements: for head office, IT, finance, HR and similar support. See management fees and intra-group services in South Africa.
- Distribution and supply agreements: for buying and reselling group products.
- Manufacturing agreements: contract or toll manufacturing for a related principal.
- Licence agreements: for trademarks, technology and know-how, with royalty terms.
- Loan, guarantee and cash pooling agreements: for intra-group financing. See intra-group loans under Interpretation Note 127.
- Cost contribution arrangements: where group companies share the cost and benefit of developing assets or services.
What every transfer pricing agreement should include
- Parties and effective date: the correct legal entities and an honest effective date.
- Scope: a precise description of what is supplied, by whom and to whom.
- Pricing: the transfer pricing method and calculation, for example cost plus a stated mark-up, including the cost base.
- Risk allocation: who bears market, inventory, credit and foreign exchange risk.
- Adjustment mechanism: how prices are adjusted if results fall outside the arm’s length range.
- Invoicing and payment: frequency, currency and payment terms.
- Intellectual property: who owns what is used or created.
- Term and termination: duration, renewal and exit terms.
- Governing law and signatures: signed by authorised representatives of both parties.
Common mistakes
- Using a generic template that does not match the business
- Back-dating agreements without reflecting what actually happened
- Never updating agreements after a restructuring or price change
- Pricing clauses that contradict the transfer pricing policy or local file
- Ignoring exchange control: some cross-border loans and royalty arrangements need approval through an authorised dealer
How agreements fit with the rest of your transfer pricing
The agreement, the transfer pricing policy, the benchmarking study and the ITR14 disclosures should tell the same story. When they do, an audit is far easier to defend. When they do not, SARS will focus on the gaps.
Impact’s founder, Chantel Venter, holds two law degrees and advanced qualifications in drafting and interpreting contracts. If your agreements are missing or out of date, Impact can draft or review your intercompany agreements so they support your pricing.
Frequently asked questions
Is a verbal agreement enough?
Legally, perhaps; for transfer pricing, rarely. Without a written agreement you rely entirely on conduct and correspondence to prove the terms, which is much harder in an audit.
Should one agreement cover all intercompany transactions?
A master agreement with separate schedules for each transaction type can work well, provided each schedule is specific about scope and pricing.
How often should agreements be reviewed?
Review them every year alongside your transfer pricing documentation, and update them whenever the transaction, pricing or business model changes.
