A Guide to Breakthrough Intercompany Operations

They view it as buying from and paying themselves, and when it comes to tallying all that bookkeeping to produce a set of financial statements, all those intercompany transactions are supposed to cancel each other out. Usually, they do, but because each side of the transaction is recorded separately, it's also common for there to be errors, discrepancies in volume and price, currency, translation, and differences, and other adjustments that must be identified and then corrected. This creates a debit and credit reconciliation hurdle for accounting teams to overcome.

This process is challenging in itself, but what is not well recognized is the complete intercompany picture. Intercompany falls into the wide gap between the need to achieve strategic high-level corporate objectives and handling the intricate details involved in effective process execution.

And as many organizations consist of hundreds or even thousands of legal entities and business becomes more global, there are tax and regulatory considerations in executing intercompany transactions, especially for those pursuing growth by acquisition. These considerations can be complicated if a transaction involves multiple legal entities buying and selling—especially if the transaction spans multiple countries, each with its currency tax regime and legal jurisdiction.

Too many multinationals silo skills and knowledge deep within organizational structures, stunting growth and creating hidden, cascading sets of risk. Instead, they should share information among departments to grow more efficiently and minimize risk. Managing intercompany processes is a systemic issue that requires holistic action, yet too many companies are not adapting.

Some indicators that you are experiencing intercompany problems include disparate, disconnected systems that limit visibility into details, the number of legal entities, and the complexity of your corporation's worldwide tax situation

Although intercompany represents a large portion of multinational commerce, intercompany processes and automation grossly lag external transaction management. All tax jurisdictions want their fair share of revenue from intercompany transactions and now expect related-party transactions to be governed with the same rigor as external transactions. As intercompany transactions increasingly shift profits across borders—operational, regulatory, and tax complexity increases along with associated risks.

Consider the negative headlines generated as recognized multinational brands are accused of mismanaging intercompany royalty rates and intellectual property amortization for tax advantage. How multinationals handle these charges between corporate entities has been the target of increased regulatory and public scrutiny.

Eager to maximize tax revenue, local authorities also challenge markups set by intercompany sellers. However, the intercompany buyer must defend the deductibility of that same pricing in a different jurisdiction. Even if these intercompany charges net to zero, the related tax costs may not, should one foreign tax authority refuse to mirror pricing deemed acceptable in another country.

To manage increased scrutiny from tax authorities, teams demand more granular and frequently updated intercompany charges to maximize tax deductibility, which flies in the face of fast and efficient closing processes for controllers. Manual processes exacerbate the issue. This creates clashing motivations between tax drivers on the one hand and the controllership on the other. It turns out that misaligned intercompany processes and muddled information impact more than just the accounting function.

Although each business unit of a corporation aims to optimize its own results, team members throughout multinationals must “think globally,” flagging decisions that could create reputational risk or result in higher total tax payments at the corporate level.

Another ironic aspect of intercompany is that, as a rule, those at the top of the organization who stand to benefit the most from improved intercompany operations are unaware that the corporation is failing to execute as it should because of an overall lack of visibility. 

Finance and accounting leaders are expected to play a broader role in supporting strategic objectives across the business, including enterprise-wide digital transformation initiatives. Yet, in many cases, the transformation of intercompany processes lags the rest of the business.

Intercompany Financial Management (IFM) is a new and holistic approach that expands further afield within Finance. By combining business-process re-engineering with technology, IFM structures, handles, and automates multifunctional processes and related-party transactions. IFM is designed to prevent messes in the accounting cycles by netting out intercompany balances in real time while reducing global compliance and tax risks. Organizations can improve operational efficiencies by unifying and optimizing intercompany accounting, allocating corporate vendor invoicing, tax enrichment, reconciliations, settlements, and journal entry booking before settlements.

And the benefits of IFM will be felt across the organization. While accounting is an obvious benefactor, tax, FP&A, and treasury workloads are now optimized to propel a new wave of efficiency and performance. Tax teams can adapt quickly and ensure their processes are agile while increasing indirect tax deductibility, minimizing tax leakage, and hardening tax compliance and defensibility. Treasury teams no longer have to grapple with intercompany accounting errors—gaining a real-time view of transactions to improve intercompany financing and forecasting and minimize FX exposure with faster, settlement-ready balances that bring increased liquidity and reduced working capital needs. And by capturing intercompany charges with unprecedented granularity, FP&A teams have billing and financial transparency to fuel business units with data-driven decisions which translates to a healthier bottom line.

Intercompany is a systemic issue that must be addressed holistically. An uncoordinated intercompany approach built on inconsistent and incomplete data poses the risk of ongoing legal, regulatory, and tax compliance issues, tax leakage, and imperfect visibility that translates into gaps in financial control. IFM evolves with changing business models and emerging market demands, enabling rapid M&A integration in an era of increasing consolidation and improving the bottom line while reducing reputational and other risks.

Your business wouldn’t get anything done without an intercompany process. That’s because intercompany is directly related to your core business of selling goods or services to third parties. For example, you source materials, manufacture, assemble, distribute, and so on, until a third party acquires it. For non-trade-related processes, it is common for companies to internally source services for their business rather than use a third party. In support of scale and efficiency, internal services are often the case with the back-office—which include managerial, research and development, HR, Finance, IT, and other shared services. Such services constitute a different type of transaction, like fee sharing, cost allocations, royalties, financing activities, etc. However, in all of the above trade and non-trade cases, a related-party transaction occurs between entities which must be tracked and managed correctly. Intercompany process thinking and continuous improvement are business-critical concepts that boil down to the following leading practices to help you speed toward operations excellence.

Intercompany process thinking and continuous improvement are business-critical concepts that boil down to the following leading practices to help you speed toward operations excellence.

Do you have a solid understanding and command of your intercompany data? Without a clear target data model, data ends up decentralized and fragmented, pieced together by manual intervention, and can lead to misinformed business decisions. It’s important to standardize data definitions to aggregate, reconcile, and cleanse data more easily and accommodate new data sources, for example, with acquisitions. A data governance framework will help your intercompany decision-making, cost management, margin analysis, and accountability. The basic intercompany functionality that may exist in ERPs was designed and developed under the premise that the enterprise would be operating on a single consistent framework. In reality, multinationals have multiple instances that aren’t fully compatible or interoperable. Master data essential to intercompany, like unit pricing, markups, and transfer pricing, can often conflict.

Different business units or regions may apply different standards to approve and record transactions (if at all), manage exceptions, invoice according to local regulations, and settle for payment. Standard processes across accounting, finance, tax, and treasury teams are essential in helping you organize and execute intercompany transactions in a repeatable and compliant way.

Aim to streamline intercompany to maximize business potential by reducing or eliminating unnecessary activities, rework, wasted effort, and bottlenecks. This means journals are not just right for accounting people but that billing and invoicing bake in tax control and streamline transaction clearing to improve cash and FX management with flexible settlement options.

By standardizing and optimizing intercompany processes, you’re set to automate aspects of the process that otherwise require human effort. For intercompany, the transaction type drives the rules and activities necessary for each step, reducing manual effort or the need for rework later and redistributing that effort to more strategic work.

Once you’ve mapped out your holistic intercompany process and identified areas to optimize and opportunities for efficiencies, the next step in your IFM roadmap is execution. In this stage, it will be important to understand how an intercompany solution can help manage your company’s operations and transaction lifecycles so you can move away from reactive accounting and achieve intercompany excellence.

BlackLine Intercompany is a set of technology solutions uniquely connecting all parts of the intercompany landscape and automating and controlling its complete lifecycle—from transaction creation through automated balancing, netting, and settlement. These solutions help multiple teams manage end-to-end intercompany operations within and across legal entities and jurisdictions, including but not limited to, policy, accounting, tax, treasury, intercompany decision-making, charging, documentation, and invoicing.

Operating across one or more ERPs and related systems, BlackLine Intercompany handles trade and non-trade transactions, so you get the correct accounting with proper transfer pricing and taxes applied, as well as automated balancing, netting, settlement, and statutory reporting.

All parties in an intercompany transaction will apply the correct and consistent accounting treatments the transaction and other details, down to the harmonized system codes for cross-border trade because these details can affect tax expense and regulatory compliance.

We also simplify your implementation journey by giving you tools to identify the quick wins, connecting you with our targeted use case solution, and applying our unique experience to deliver value. With this solid foundation, you’re up and running on BlackLine and the stage is set for future phases of your journey to ‘beyond zero.’

With BlackLine, you can automate and control the entire lifecycle of many common intercompany transaction types. Whether they are frequent/high-volume or low-volume/non-routine items, the solution will help drive unparalleled transaction automation.

Intercompany solution bundles transform how companies manage their intercompany operations and the transaction lifecycle. BlackLine’s solutions are designed to help multinational corporations navigate the growing complexities of transacting across multiple legal entities and jurisdictional boundaries using ‘from-to-service type’ data structures and logic. There is a ready-made library of templates aligned by indirect tax attributes for consistent tax treatments and compliance, with over 400 service types across more than 100 countries to ensure audit-ready, tax-compliant invoicing. We help tax teams substantiate tax deductibility for hundreds of tax authorities and prevent VAT leakage to drive lower indirect tax expense in every jurisdiction.

Done well, IFM can benefit a broad set of people and roles in a corporation through staff and process efficiency gains, better management of tax costs, and greater control of risks.

Tax departments, in particular, benefit from more effective worldwide tax management as this allows them to detect and prevent local income tax leakages (when intercompany charges are disallowed and taxable income increased), reduce workloads, and develop stronger audit defense capabilities around intercompany decision-making.

In multinational organizations where people, products, and services routinely cross legal entities and borders, HR, sourcing, and supply chain managers can gain complete visibility to intercompany to better understand total costs and how best to manage them.

And for corporations that use acquisitions strategically, IFM can streamline the post-merger financial integration process.

Significant operational inefficiencies often come down to manual, bespoke, unsystematic intercompany processes. An IFM solution systematizes, automates, and enforces processes that can unlock value by making intercompany operations more efficient.

Let’s break that down. An enterprise must be capable of classifying and cataloging what billing is transacting through intercompany. However, this systematization is of no real use unless the solution can also drive rigor across every unit entity and function impacted by the billing. Finally, these processes need to be automated, so they are consistent and repeatable, transferable without quality erosion, automatic, and compliant. Combined, this will allow the enterprise to operate better across many functions as the effects ripple outward.

An IFM approach to improving operational efficiency begins by stepping back to look at all related subprocesses and data sources that go into managing intercompany transactions. This contrasts with a traditional record-to-report approach, which simply accepts the outcomes of these processes (e.g., the intercompany numbers being billed across and throughout the corporations).

BlackLine Intercompany has a demonstrated track record of helping teams centralize intercompany operational processes, including order to cash, procure to pay, and record to report, allowing F&A to more efficiently support evolving tax statutory requirements and audits, including but not limited to, SAFTI, GILTI, and BEAT taxes.

Customers see, on average, 60% to 80% efficiency gains, and for closing teams, over a 60% reduction in days to close. These vastly shortened cycle times are particularly important given that long cycle times result in stale data which is ultimately impaired data. Shortened close cycle times mean more agility, which results in better competitiveness in a global economic environment that is in flux and rapidly changing.

Tax-efficient intercompany processes and pricing strategies enable increased deductibility, reduce tax leakage, and lower effective tax rates so that post-tax income is maximized. To gain these advantages, sophisticated tax process design, data management, and substantiation are essential but can be challenging to accomplish.

Control, granularity, and accessibility of data related to intercompany generally fall far behind the rigor provided to third-party transactions. Exacerbating the problem are intercompany transactions and the challenges of managing them which are ever-increasing as companies expand globally and introduce complexity with new, disparate systems and significantly accelerate the growth of intercompany transaction volumes.

It’s clear that control and management of intercompany tax processes need to evolve. IFM helps companies design, build, and manage intercompany operating models. It also allows tax teams to become a core component of a multinational’s intercompany strategy and management, using automated, consistent, transparent, and accurate data and logic for that data.

The BlackLine Intercompany solution allows organizations to streamline intercompany processes, including tax processes and pricing strategies that can reduce not only tax leakage and costs related to audits, but also operational inefficiencies. It allows them to substantiate deductibility for hundreds of jurisdictions, improve transfer pricing transparency, and prevent VAT leakage. Furthermore, it empowers transaction lifecycle management from initiation to close, ensuring consistent tax compliance that can free companies from conservative risk-avoidance to drive strategy with confident substantiation.

A new approach to managing intercompany operations will help a company realize productivity and efficiency gains. But a great intercompany operation creates pathways for new opportunities for growth, best-in-class performance, and continuous margin improvements.

Driving margin improvements goes back to a core purpose of any business, which is to deliver shareholder value. All businesses must constantly find pockets of optimization to tune up and make the engine run better. Often overlooked, intercompany operations in multinational corporations are rich with opportunities for optimization that positively impact margin.

For example, when an enterprise seeks to make margin improvements at scale, it can do it in three ways: through people, processes, or technology. Improving intercompany operations is no different.

Most often, the best solutions come from a combination of all three. Still, processes and technology are the key drivers of margin improvements because they drive higher productivity and better margin improvements than adding staff. Adding more people often increases cost rather than changing processes. Investing in technology can bring some quick-win improvements (such as more accurate transfer pricing) while proving out ROI over time and establishing automation that continues to deliver dividends over time.

Get started by identifying known goals and macro topics such as inflation, price erosion, or changing tax policy. Then, examine how you can offset these challenges. Look for operational productivity that you can achieve by doing things differently, better, and in a more automated fashion. You’ll discover that technology-supported process improvement delivers operational efficiencies across the enterprise that represent significant savings over time by systematizing, automating, and enforcing intercompany processes.

Multinational corporations excel at turning trade-based receivables into cash. Significant resources and solutions are dedicated to negotiating contracts, delivery, billing, and collections on customer trade to maximize income, minimize cost, and minimize time to revenue.

Unfortunately, intercompany transactions get far less attention and effort. In some cases, they are even left unsettled and unresolved. That’s a strategic mistake because of the value and opportunity lost in the resulting inefficiencies, lack of information, and lack of control over these funds.

However, improving intercompany processes and systems offers a systematic way to become more precise about how cash is managed and where it sits across and throughout the enterprise, bringing significant benefits in avoiding costs and capitalizing on hidden opportunities. From better business decision-making to improving liquidity, reducing foreign currency risk, or streamlining and consolidating intercompany payments, a comprehensive IFM approach allows you to improve how intercompany transactions are settled and resolved. It will enable a standardized process for intercompany settlements and integration with treasury systems to facilitate intercompany lending, cash pooling, and FX exposure management.

BlackLine enables a disciplined approach to intercompany invoice settlement and allows companies to forecast cash needs and availability through cash pooling in the right currencies. The solutions are proven to help treasury teams settle more quickly because AP/AR billing routes are centrally managed, and payments between entities are streamlined and reduced. Furthermore, after BlackLine, intercompany charges in multinationals are settled at least four days faster, improving liquidity and unlocking access to cash. BlackLine also enables the reduction of foreign currency risk by as much as 50% on average due to faster settlement and improved currency controls.

IFM is a comprehensive discipline for managing intercompany transactions. Automating reconciliations and consolidations is only part of the job. It's essential to control and automate the accounting treatment of the transaction with optimal transfer prices. IFM means being able to automatically pull together all into a global intercompany subledger that so many companies need but don't have. It's about handling the accounting details and tax data together to minimize tax leakage. The ability to manage all these moving parts is necessary to optimize the corporation's tax exposure, minimize tax leakage, and ensure consistent tax and regulatory compliance.