Asset managers are making good progress transforming their organizations. But few seem to have thought about the tax and transfer pricing implications of their actions. Opportunities (and risks) could be missed.
You are a decision-maker at a respected Asset Management firm. You have recognized that the market is evolving — you have watched the rise of passive and alternative investment strategies, dealt with a range of new regulatory developments, managed growing cost pressures, and are adapting to the significant competition from fintechs and online distribution channels.
If you are like most Asset Managers, you probably have a plan. And you are probably making good progress towards reinventing your operating models and processes to prepare your organization for the future. But have you thought about the tax implications of your transformation plan? Should you?
The rules are changing
Many of the changes that Asset Managers are currently making to their business and operating models will have a direct impact on their tax and transfer pricing positions. On the heels of the OECD's Base Erosion and Profit Shifting (BEPS) work, we have seen unprecedented changes to transfer pricing rules around the world. It's not just the scope of the changes that is creating challenges, it's also the pace. For example, ongoing reconsideration of transfer pricing models by the OECD may mean that changes to operating models will create reportable income in unexpected jurisdictions.
It's not just Asset Managers; national tax authorities are looking to transform their models as well, and they are moving quickly to implement their agendas. This includes a growing range of unilateral measures being adopted in certain jurisdictions. The passage of the US tax reform bill, for example, forced many asset managers to quickly rethink things like the volume and nature of intercompany payments, the location of value-creating functions and assets, the direction of related-party interest flows, and a range of other factors.
It's not just asset managers; national tax authorities are looking to transform their models as well, and they are moving quickly to implement their agendas.
Role of technology
Many Asset Managers are changing the very fundamentals of their operating and business models in an effort to improve efficiency, enhance agility and increase transparency. New technologies and tools are being implemented to enable that shift.
Whereas in the past, technology played a supporting role in the asset management model, today it is starting to assume a much more central position, often actively effecting investment decisions and executing trades. And that requires Asset Managers to rethink the role that technology plays in their value chain.
Asset Managers with new robo-advisory or Artificial Intelligence (AI) tools, for example, may need to offer management fees significantly lower than those charged on traditional products. What will that mean for profitability? How will value be allocated to the technology asset versus the 'people' functions performed? How will a reduced management fee structure complicate existing revenue splits across the value chain?
Some of the more tax-savvy asset managers have started to recognize that their transfer pricing policies may be out of date.
Taking another look
Some of the more tax-savvy Asset Managers have started to recognize that their transfer pricing policies may be out of date. As a result, they are undertaking a number of aligned strategies to make sure they are not missing any opportunities or creating any new risks.
What are they doing? KPMG member firms' experience points to five main areas of activity
- They are aligning their tax and transfer pricing function with the business. The leaders are ensuring that tax and transfer pricing has a seat at the table when new products are being introduced. And they are encouraging their tax and transfer pricing professionals to speak up when they see risks or opportunities related to either new products or the wider operational transformation that is underway.
- They are assessing their value drivers. Asset managers need to have a clear understanding of the value drivers that underpin their new operating models. That will allow them to properly assess how changes in, say, the sales function might impact online distribution, or how the use of AI might influence the way fees are distributed.
- They are taking a closer look at the regulatory and tax changes. Given the range of changes now underway across jurisdictions, Asset Managers will need to spend some time prioritizing them. Which will have the greatest impact? Can the impact be modeled with related scenario analysis? What options are available for mitigation? What is the timeline for change? And what will it cost? Answering these questions up front will allow for faster decision-making and more focused investment.
- They are augmenting their skill sets and capabilities. Most Asset Managers run a fairly lean tax and transfer pricing function. And so they recognize they might lack the skills, experience and insight needed to anticipate and respond to recent changes in tax and transfer pricing rules. The leaders are fostering closer relationships with advisors that can keep them informed and moving in the right direction to actively deal with changes as they arise.
- They are applying technology to support their transfer pricing decisions. No matter the transfer pricing policy, manual execution of the relevant intercompany payments can be a burdensome and, ultimately, risky undertaking, particularly as the volume of those payments grows. The leaders are automating these processes, in combination with robust policy-setting and governance regimes, to optimize efficiency and minimize compliance risks.