What Are Intercompany Trade & Non-Trade Transactions & How Do They Impact Multinational Corporations?

Broadly speaking, intercompany transactions are those that occur between entities of the same consolidated group, including manufacturing-related product transactions, corporate allocations, shared services charges, services charged between business units, and many others. While third-party transactions with customers and suppliers tend to get the most focus, intercompany transactions are far from insignificant: an estimated 70% of global trade is intercompany-related.

Intercompany transactions include trade and non-trade transactions. Whereas the terms ‘trade’ and ‘non-trade’ can have different meanings in different industries and contexts, we are using them here to refer to transactions involving goods (products), “intercompany trade,” and services or “intercompany non-trade.”

Trade transactions are more easily defined and documented with billing and payment documentation, data structures like SKUs, and cost data coming from bills of material.

Non-trade transactions can quickly become tangled, vague, and difficult to describe, track, and substantiate in accounting and taxation contexts. Because a significant proportion of intercompany is comprised of non-trade transactions, they present a challenge for multinationals that want to maximize tax savings, efficiency, and value.

The impacts of mismanaged intercompany transactions on a multinational include:

• Confusion and conflict among different business units

• Tax leakage due to the inability to substantiate losses in a given jurisdiction and due to the existence of (avoidable) irrecoverable indirect taxes (i.e., transactional taxes such as VAT and GST)

• Unacceptably large drains on capacity as staff spends too much time unraveling settlement confusions

• Inability to achieve a tax-effective, efficient supply chain

• Inability to close quickly and with confidence

• Increased audits and possible loss of reputation due to substantiation mistakes impacting taxation in a particular jurisdiction

• Write-offs of unreconcilable intercompany balances

An inconvenient general truth about intercompany transactions—and intercompany non-trade transactions in particular—is that no ERP handles them well.

Even with a single global ERP instance, intercompany is often a tangle, without enough transparency, granularity, definition, or access to master data. Add to that the common and complex situation of a multinational with multiple ERPs that change with each new acquisition and update. ERPs simply aren’t set up to handle intercompany situations, and various data silos make the problem even more difficult to solve.

Even a single repository of data or data lake does not remediate ongoing ad hoc management of intercompany processes. Resolving disputes or simply straightening out confusion is labor-intensive and expensive, as companies struggle to substantiate tax filings or hustle to close at the end of the quarter.

It can be difficult or impossible to get different business units to agree on the drivers of intercompany transactions (non-trade in particular) and the logic for processing them. Each department that serves multiple entities—e.g., HQ, Procurement, Manufacturing, Sales, Distribution, Shared Services—will naturally promote its own view on what the drivers and logic should be. The result is often dysfunction or decrees from the C-level that settle the issue, but they don’t solve the underlying problems of clarity and accessibility.

Intercompany financial management (IFM) is a comprehensive approach to managing intercompany transactions and related accounting. It uses technology and expertly designed systems to create clarity with respect to data, processes, drivers, and logic surrounding all intercompany financial activity, including non-trade.

IFM functions like a virtual intercompany subledger that enables each business unit and department to gain access to the data describing and governing intercompany transactions, whether it’s trade or non-trade. This holistic, systematically designed and automated approach maximizes efficiency and accuracy, minimizes tax leakage, improves tax defensibility, creates visibility and transparency of intercompany upstream and downstream transactions, and auto-reconciliates intercompany journal entries.

The benefits of IFM with respect to intercompany transactions are felt throughout the enterprise, as confusion, frustration, competition, and disputes are minimized, and teamwork, efficiency, systematization, and automation increase value flows. The effects are especially pronounced wherever an uncoordinated, data-opaque, internecine dynamic had evolved in intercompany transactions—to which non-trade transactions are especially susceptible.

A Fortune 50 oil & gas multinational was struggling with corporate allocations to more than 300 entities around the globe (180 countries with multiple ERP instances). The process was highly manual, prone to errors, and consuming excessive time from accounting and finance resources globally.

The entities receiving allocated charges believed it was a “black box" process with limited visibility into the supporting details, especially regarding variances to plan that often materially impacted each entity’s performance results. Furthermore, the legacy process required significant manual and reactive work from the tax organization to maintain compliance from a statutory reporting perspective (indirect taxes, transfer pricing, substantiation).

After adopting IFM, the multinational realized significant value, including a 75% reduction in processing time for corporate allocations, a three-day reduction in the financial close, automated tax compliance, and improved visibility for entity decision-making and financial performance management.

BlackLine helps multinationals systematize the management of intercompany processes, including non-trade transactions, through new technology and an enterprise’s cleanly designed master data subledger.

The art of creating IFM with process uniformity and clarity of data, including in non-trade, requires experienced intercompany professionals. BlackLine can help.

The benefits of clear visibility and control over intercompany transactions include:

• The ability to close much more rapidly, largely via automation

• Tax-effective performance with substantiation in all jurisdictions

• More cohesive teams throughout the enterprise

• A cessation of large drains on capacity as talent no longer must chase down intercompany imbalances and argue about their sources

BlackLine Intercompany can help deliver more to your business than just zero balances. Design and improve your intercompany operating model, determine the tax impact of your operating model, configure billing routes, and automate transactions using a process based on defined service types.

It’s time to go beyond zero by improving your bottom line, increasing liquidity, and optimizing your F&A talent. See it in action.