What is Intercompany Transactions?
Intercompany transactions are sales, purchases, loans, or transfers that occur between two or more entities within the same corporate group. While each entity records the transaction in its own books, the group must eliminate it during consolidation so the consolidated financial statements only reflect transactions with external parties.
How It Works
- Each subsidiary records the transaction in its standalone books as a sale, purchase, loan, or service charge.
- At month-end the entities reconcile intercompany balances to ensure both sides agree on the amount.
- During consolidation, intercompany revenues, costs, receivables, payables, and unrealised profits in inventory are eliminated.
- Any timing or pricing differences are investigated and resolved before publishing group results.
Saudi Context
Saudi groups with multiple subsidiaries, especially family-owned holding companies and Tadawul-listed groups, must reconcile and eliminate intercompany transactions every reporting cycle. ZATCA may also review intercompany dealings for transfer pricing alignment with OECD guidelines applied in the Kingdom.
Example
A Saudi parent sells goods worth SAR 500,000 to its subsidiary at a 20% markup. At consolidation, the SAR 500,000 sale and corresponding purchase are eliminated, and the unrealised SAR 100,000 profit in the subsidiary’s inventory is removed until the goods are sold externally.