Moving money between companies: A guide

What do we mean by compliance?

Talking about compliance on this matter means having the appropriate intercompany agreements for your multi-national group. It refers to the process of ensuring that a multinational company's intercompany transactions between its various subsidiaries or divisions in different countries comply with the relevant tax laws and regulations.

A global organisation for world trade, known as the OECD, has Transfer Pricing Guidelines that go into more detail on this. These guidelines provide direction on how to value cross-border transactions for tax purposes between related companies, using a principle called "arm's length".

In a nutshell, abiding by the arm’s length protocol means you’re trading between your own entities as if they are unrelated companies. When you buy or sell between your own entities, each must take into consideration the tax laws in their respective jurisdictions.

Governments have this in place to prevent companies from moving profits out of the country and dodging taxes.

What are the risks of non-compliance?

In certain jurisdictions, corporate groups may be fined or receive a penalty for not providing intercompany agreements on request. An auditor will use any discrepancies in your accounts to justify further investigation into your business, resulting in a rather lengthy and costly investigation.

As a remedy to your lack of documentation, local tax authorities may taken it upon themselves to recategorise your transactions in a way you never intended. This could increase your tax bill.

And speaking of tax bills… how about double taxation? If you move revenue made by one entity to another entity without the right documents, the first will have to pay tax on that revenue while the other has to pay tax on the money that it receives (also considered revenue).

Examples of non-compliant transfers

Let’s presume your US-based parent company sends money to its foreign subsidiary to fund its operations. It records the transaction as a loan in its books. However, if no credit assessment has been made or your company cannot demonstrate the loans are contracted at arm’s length, as per the OECD guidelines, this would be non-compliant

Say you’re an Indian company that opens up a US-based entity to sell to American customers. If you’re generating revenue in America using intellectual property (IP) owned by the Indian company and sending that revenue back to India without a services agreement between the two, transfer of IP and revenue could be deemed non-compliant, both by US and Indian tax authorities.

If an entity cannot demonstrate a legal right to sell the services of another entity through a services agreement, it cannot legally sell that IP.