The 7 Reasons YOU Should Be Running Your Intercompany Charges Monthly
January 12, 2022
As the finance team of an SME or startup that has expanded internationally and has multiple entities in the group, your resources are spread thin. You have intercompany charges to make between those group entities to properly allocate costs and/or to implement your group transfer pricing policy. Processing these charges monthly can feel like a ‘nice to have’, and often doesn’t make it high enough up the priority list, ending up being run yearly for your annual accounts and tax return.
Sound familiar? Here are 7 reasons why you should be running your intercompany charges monthly:
It’s like washing the dishes - piling all of your dirty dishes up ultimately increases the difficulty of washing them and you’ll have to spend 30 minutes washing up rather than 2 if you’d done it at the time. As with dishes, running your recharges monthly gives you a recency benefit. By increasing the frequency of the charges you shorten that time period and reduce the likelihood of forgotten details, which can be particularly challenging if the relevant people have left the business in the meantime.
Gone will be the days of being questioned by the investor or director about why one month’s management accounts look so wildly different to the rest.
Running intercompany charges once a year means that in the 11 months prior, you risk inaccurately reporting your costs and revenue for sales tax purposes. Some countries also require you to make quarterly tax estimates, the US for example. If you haven't run your charges such that the ensuing costs/revenues are included in those estimates, you will miscalculate and misreport your tax.
Regular posting of your intercompany transactions gives you a better view of your expected yearly profit and associated tax liability. Without this visibility, the consequent tax amount could come as a shock.
Running charges yearly can result in many inaccuracies, particularly when recharging based on factors such as headcount. For example, if you apportion central software subscriptions by team headcount, the figure you use will be inaccurate for 11 of the 12 months. Whereas if you’re recharging on a monthly basis, you can charge based on the exact headcount each month.
Intercompany transactions must be at an arm’s length (i.e. what independent third parties would do) for transfer pricing compliance. Independent third parties would not wait a year to invoice each other. So, neither should connected group entities. By running your charges and raising invoices monthly, you are substantiating that it is an arm’s length relationship.
Without regularly running an arm’s length intercompany charge, it can be very hard to assess the performance of different territories. By running them monthly you will have a better basis to assess (and reward) the performance of your teams in different territories.
Running your intercompany charges monthly truly is a win-win scenario, however, we understand that this can be challenging for a startup with an endless stream of tasks. This is why we have created Mayday Recharger – to automate your intercompany charges on a monthly basis, saving time and money!
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