Structuring for success: a guide to inter-company agreements and cross-charging

A large international project is complete. The client is happy, the project was profitable on paper, and the delivery team receives accolades. However, a dispute arose weeks later between New York and London office leaders. The London office claims the cost of "borrowing" a team of New York-based developers was far higher than anticipated, erasing their local profit margin. The New York office argues that they provided the resources at cost. Without a formal agreement, there is no single source of truth, leading to internal friction and inaccurate financial reporting.

This "invisible" work—one part of your business providing services to another—is one of the most significant sources of financial leakage and operational confusion in a growing global firm. Managing it correctly is a sign of true operational maturity. The solution lies in creating a robust framework through inter-company agreements (ICAs) and a transparent process for cross-charging.

This guide provides a practical overview for COOs and finance leaders on implementing this crucial structure. It is a deep dive into the discipline of multi-entity management, a key component of our overall guide to Mastering global project operations.

An inter-company agreement (or ICA) is a formal, legally binding contract between two or more related entities within the parent company. It dictates the terms and conditions under which one entity will provide goods or services to another. Think of it as a Master Services Agreement, but for internal clients.

While it can feel like administrative overhead, implementing ICAs is critical for three main reasons:

1. Tax and Legal Compliance: This is the most important reason. Tax authorities worldwide (like the IRS in the US) have strict rules around how related companies transact with each other. They need to ensure that companies are not artificially using internal transactions to shift profits to countries with lower tax rates. These rules are known as "transfer pricing" regulations. A formal ICA is your primary evidence that you comply with these regulations.

2. Operational Clarity and Accountability: A clear ICA prevents the exact kind of internal disputes described in the introduction. It defines the "rules of engagement" for cross-charging, ensuring that both the entity providing the service and the entity receiving it are aligned on costs, scope, and responsibilities.

3. Accurate Performance Measurement: To know if your London office is truly profitable, you need to accurately account for the cost of services it "buys" from other offices. Proper intercompany accounting ensures that each business unit's Profit and loss (P&L) statement reflects its performance. This financial clarity is the foundation required to measure project margin across countries accurately.

A well-drafted intercompany services agreement should not be overly complex but should contain several key components to be effective and compliant. Think of it as a foundational template for all internal service exchanges.

Scope of services

Be specific about the services to be provided. Instead of "IT support," define it as "Level 1 and Level 2 helpdesk support, and server maintenance for the London office's local infrastructure." This clarity prevents future disagreements about what was included in the price.

Pricing methodology (transfer pricing)

This is the heart of the tax compliance agreement. You must define how the services will be priced. The universally accepted standard is the "arm's length principle", which means the price should be the same as it would be if the two parties were unrelated. The most common method for services is the "cost-plus method," where the providing entity charges the actual cost of the service plus a reasonable markup (e.g., 5-10%). Documenting why you chose a specific transfer pricing for services methodology is crucial.

Invoicing and payment terms

The agreement should specify how and when the cross-charging will occur. Will invoices be issued monthly or quarterly? What currency will be used for the settlement? What are the payment terms (e.g., net 30)? Deciding on the settlement currency involves similar strategic thinking to that used when quoting and invoicing international clients.

Intellectual property and confidentiality

The ICA should clearly state which entity owns that IP if the services involve creating intellectual property (like software code or marketing materials). Standard confidentiality clauses are also necessary.

Term and termination

Define the duration of the agreement and the conditions under which it can be amended or terminated by either party.

With a strong ICA in place, cross-charging becomes a straightforward operational workflow rather than a complex negotiation. The process typically begins when a resource, often identified through your global resource pool, records time against a project belonging to another office.

The workflow then looks like this:

1. Work is performed: A resource from Office A (e.g., New York) records time against a project for Office B (e.g., London).

2. Cost is calculated: The system automatically calculates the internal cost of that time based on the pre-defined transfer price set in the ICA.

3. Internal Invoice is generated: At the end of the month or quarter, the intercompany accounting process generates a summary invoice from Office A to Office B for all services rendered.

4. Financials are updated: This transaction is recorded in the books of both entities. For Office A, it's an inter-company receivable, and for Office B, it's an inter-company payable.

This structured process ensures every hour of internal work is accounted for accurately and transparently.

Attempting to manage inter-company agreements and cross-charging using spreadsheets and manual journal entries is not only inefficient but also a significant compliance risk. Maintaining an audit trail and proving to tax authorities that your transfer pricing is being applied systematically is nearly impossible.

This is where a multi-entity PSA software becomes essential. A platform like VOGSY is designed to handle this complexity natively:

• Centralized Rates: You can establish and store transfer pricing rules and rates within the system.

• Automated Tracking: When an employee works on an inter-company project, the system automatically applies the correct internal cost rate.

• Automated Invoicing: The platform can generate the detailed inter-company invoices required for your accounting records with a single click, creating a perfect audit trail.

Automating the intercompany accounting process dramatically reduces administrative overhead and ensures your firm remains compliant.

• What is the difference between cross-charging and transfer pricing? Transfer pricing is the methodology or policy you use to determine the price of an inter-company transaction (e.g., "we will price all internal services at cost plus 10%"). Cross-charging is the operational act of actually billing and paying for that transaction.

• We're a small but growing firm. At what point do we need formal inter-company agreements? You should implement formal ICAs as soon as you have separate legal entities in different tax jurisdictions providing services to one another. Do not wait until it becomes a complex problem. It's much easier to establish good habits early.

• Can we use a simple intercompany services agreement template we find online? While an online template can be a good starting point for understanding the structure, your ICAs should always be reviewed by a legal and tax professional familiar with the specific jurisdictions in which your business operates. The rules for transfer pricing for services can be complex and vary by country.

• How do we track work done for another entity in our company without creating a substantial administrative burden? The key is to use a unified project and resource management system. When an employee fills out their single timesheet for the week, they select the correct project. If that project belongs to another entity, the system should handle all the intercompany accounting in the background. For the employee, the process is identical.

• Our office leads complain that transfer pricing is too complex. How can we simplify it? For most professional services firms, the cost-plus method is the most straightforward and defensible approach. The key is automation. Office leads don't need to understand the complex calculations if the system you use is configured to handle them automatically and transparently.

Formal inter-company agreements and a straightforward cross-charging process are not bureaucratic burdens. They are the internal scaffolding required for strong corporate governance and scalable global growth. This framework provides the clarity, compliance, and financial accuracy needed to operate as a unified global firm rather than a collection of disconnected offices. Investing in this structure creates a stable foundation to expand your business confidently and profitably.

Return to our Mastering global project operations hub to explore the other pillars of international success. Follow VOGSY on LinkedIn for ongoing insights, and when you are ready to see how a unified platform can automate multi-entity management, we invite you to request a demo.