Related-Party Transactions Require Entity-Level Evidence
Group approval does not replace commercial substance, entity-level evidence or independently reviewed tax treatment.
Governing related-party transactions at entity level
A transaction does not become commercially and tax-defensible merely because it was approved at group level. The local entity must be able to show what it received or provided, why the arrangement benefits its business, how the amount was determined, how the terms compare with relevant alternatives and how the transaction was reflected in its own records.
Apply an entity-level lens
Centralized treasury, procurement, technology and management structures can blur the distinction between group purpose and local benefit. The board or group function may authorize an arrangement, while the Yemeni entity still lacks an executed agreement, allocation basis, evidence of service, repayment terms or local approval.
The review should address the functions performed, assets used and risks assumed by each party. It should also identify whether the transaction represents goods, services, financing, use of an asset or right, cost allocation, capital support or a shareholder activity. The tax analysis should be aligned with actual conduct rather than contract wording alone.
Evidence must support both value and behavior
For service charges, the file should establish the nature of the service, recipient, period, personnel or resources involved, benefit and charging basis. For goods, it should connect prices, quantities, shipment and customs records. For financing, it should document principal, currency, term, interest, repayment, security and the entity’s capacity to service the obligation.
Qualitative evidence can be as important as a calculation. Meeting records, project outputs, system access, deliverables, correspondence and operational data may demonstrate what actually occurred. A group allocation spreadsheet without this context is often insufficient.
Do not allow current accounts to become a blind spot
Intercompany current accounts frequently accumulate trade items, cash transfers, charges, settlements and historical differences. If they are not reconciled by counterparty, currency and transaction type, management may be unable to distinguish operating balances from financing or capital support.
Each material balance should have an aging profile, confirmation, underlying transaction schedule and settlement plan. Long-outstanding or repeatedly rolled balances should trigger reassessment of their substance, tax treatment, foreign-currency implications and financial reporting classification.
Tax and financial reporting analyses are related but distinct
Where IFRS is applied, IAS 24 requires consideration of related-party relationships, transactions, balances and disclosures. That accounting assessment does not replace the tax analysis, and group financial statement disclosure does not by itself demonstrate that a charge is deductible or appropriately priced. The two workstreams should use consistent facts while reaching conclusions under their respective frameworks.
Questions for management and those charged with governance
- Can the entity explain the commercial benefit and actual conduct of each material arrangement?
- Are agreements and pricing analyses prepared before or during the transaction rather than after an inquiry?
- Do tax, legal, treasury and financial reporting records identify the same parties and balances?
- Are overdue intercompany balances reviewed for substance and recoverability?
- Is the local approval process visible and independent of the initiating group function?
Crowe AHFAD supports organizations in reviewing related-party arrangements, entity-level evidence, account reconciliations and the alignment of tax, governance and financial reporting considerations.