For many years, the Organization for Economic Cooperation and Development (“OECD”) has introduced guidelines aiming at aligning companies’ value creation with the taxation of their profits. These principles also apply to the Asset Management industry.
Transfer Pricing (“TP”) complexity materializes when the Management Company (“ManCo”) delegates part or the totality of its asset management activities to other entities or branches within the same group. Such contracted out activities can either consist of value adding functions such as investment advisory/sub-advisory, investment management, and distribution services, or routine functions such as mid-office or back-office support services.
The key challenge is determining how the income earned from the fund (i.e. management fee/performance fee) should be split across the different group entities/branches based on their value contribution. A set of questions can help the Asset Manager with defining the most appropriate Transfer Pricing policy:
- Which functions contribute to value creation within the asset management group?
- Which are the functions delegated to related party companies and which are the functions performed by the ManCo?
- Which are the key contributing entities?
- How is the ManCo remunerated? Is this remuneration aligned with its functional profile?
- How are the related parties remunerated for the activities delegated by the ManCo?
- What is the most appropriate TP method (e.g. CUP, cost plus or profit split)?
Tax authorities worldwide have recently started to enhance their TP knowhow in the Asset Management area, an industry which has historically not been intensively audited for Transfer Pricing purposes. The result is a widespread effort to clamp down on Asset Management structures designed to shift taxable profits to offshore locations.