Does anyone have a written justification for cross-charging foreign subsidiaries for HQ managing credit agreement negotiations and securing financing on behalf of the global organization as a whole and subsidiaries in particular?
Intercompany Management fee justification
Answers
Thomas,
I've done this a few times; the process is either an ongoing service or a one-off. It is easier to do as an ongoing thing, as you have an umbrella for structuring repeated cross billings, but the document is the same....just a brief agreement indicating the service, the billing period, and the billing calculation.
The justification is self-evident in the documentation that you prepare; a simple services agreement specifies the type of service (in this case negotiation on behalf of the internal client company). The bill that you settle periodically specifies the services performed and the cost of those services (say, for example, 14% of
The gray area for me on this topic is whether it should be a straight-cost agreement or a cost+ agreement. Where I've drawn the line is that if the sub is doing the majority of their work on behalf of the parent, and the parent is getting revenue as a result, do it cost+ (5% or so) so that the sub is at least nominally profitable on those activities. If it is really a case where you'd cut an employee into bits (if you could) and act on behalf of each of the companies to each of their benefits, then it is a straight cost thing.
Hi Thomas,
Besides executing an inter company agreement, as Keith recommends, if your question is about what documentation would be required to justify a
• Company overview
• Industry analysis
• Functional and
• Transactional analysis (description of the inter-company transactions)
• Economic analysis (description of the search for comparable transactions or companies to the ones involved in the inter-company transactions and comparison of Company results to arm’s length results)
• Conclusion
An important element is to explain the benefits of the services provided and that the receiving affiliate would otherwise seek such services from third parties.
Jake
Hello Thomas,
If the subsidiary is on a cost plus with the parent then it is necessary to ensure that all costs relating to the subsidiary are accounted in the subsidiary to arrive at the correct cost plus mark up. Therefore if any costs or expenses relating to the subsidiary are paid for or taken care by the parent then it becomes necessary that the costs relating to the subsidiaries incurred by the parent are pushed back to the subsidiary by way of a cross charge to ensure that the subsidiary is able to charge the correct mark up. This is important since it affects the taxable income of the subsidiary and also has transfer pricing implications.
Thomas,
as you can see from above answers you need to take into account several issues.
The way we organized it is the following:
1. determine type of services. e.g. IT,
2. draft a contract between service provider and receiver (usually general in terms) but specific enough towards the service (e.g. IT)
3. Provider needs to have a set of accounts, split by department, to be able to prove the costs
4. Determine a way to split the cost between the provider and the receiver(s).
This can be by turnover or by gross margin or headcount or .... Make sure it's objective and valid for your type of business.
5. be prepared to deliver your numbers (open your accounts) to the fiscal authorities, even abroad if your 'receivers' are located there.
So we had a contract by type of service, a set of accounts which allowed us to prove the costs, the possibility use different recharge calculations etc, etc, etc....
Usually the provider uses a mark-up of 5%.
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