Asset management companies operate in a globalized, integrated, and regulated environment, making transfer pricing a critical area of focus for tax planning and compliance. These firms perform complex functions such as portfolio management, research, marketing, and support services across multiple jurisdictions. Complex intercompany transactions are inevitable.
Below is a summary of some of the most important transfer pricing considerations for asset management companies.
Value Chain and Functional Analysis. A robust functional analysis is essential to determine where value is created. For example, portfolio management is often the key value driver, overshadowing functions like investor relations or fund administration. Properly assigning profits to each group entity based on their contributions, with specific tieback to the Company’s unique value chain, is a cornerstone of defensible transfer pricing.
Characterization of Entities. Asset management entities may perform a variety of functions to varying degrees, making transfer pricing characterizations ambiguous. For example, entities may be characterized as full-fledged managers, limited-risk service providers, distributors, or some combination of these based on business segment. Each characterization carries different risk and return profiles, directly impacting the transfer pricing methodology and profit allocation.
Transfer Pricing Methods. The choice of method depends on the nature of the services and activities performed, as well as the Company’s internal and external transactional footprints. The Comparable Uncontrolled Price method may apply where fees for similar services are observable, while the Transactional Net Margin Method is common for routine support services. The Transactional or Residual Profit Split may fit where value is jointly created by two or more entrepreneurial entities.
An important note here: the nuance and complexity of the industry can cause operational transfer pricing headaches. In designing and implementing policies, it is important to be intentional and accurate, but equally crucial not to allow perfect to be the enemy of the good by introducing too many exceptions or overly complex models.
Comparability and Benchmarking. Intercompany fees such as management and performance fees must be arm’s length. When comparable company or agreement benchmarking is necessary, the industry has unique comparability factors, such as assets under management (AUM), service scope, and risk profile. Moreso than other industries, financial assets and risks can play a predominant role in comparability.
Intangible Assets and Brand Value. Marketing and distribution activities may contribute to the development of local market intangibles, raising questions about ownership and compensation for brand value. These issues are especially relevant in cross-border fund distribution, and can present challenges when attempting to characterize an operating affiliate as a routine service provider or limited risk reseller.
Regulatory Environment. Asset management companies are subject to strict and highly localized laws and regulations, meaning that it can be very difficult to implement a fully consistent transfer pricing model. Localization of offerings and approaches can furthermore lead tax authorities to assert more fully-fledged functionality and therefore higher profit allocation, intensifying transfer pricing scrutiny and disputes.
Conclusion. Transfer pricing for asset management companies requires careful analysis of functions, risks, assets, and value creation across jurisdictions. A defensible strategy must be grounded in economic substance, supported by reliable data, and compliant with global and local tax regulations, while also being sufficiently simple to implement and explain to auditors and tax authorities. When choosing a transfer pricing advisor, asset management companies should ensure that their service provider understands the nuance of the industry and the specific business model. A “cookie-cutter” approach to transfer pricing in asset management is a fast track to tax fights and bad outcomes.
