“If there’s an opportunity to make something simple very difficult the IRS is very good at it,” said Marc Levey, a partner of Baker & McKenzie in New York, who chaired a panel called Management fees: between a rock and hard place at International Tax Review and TPWeek's Global Transfer Pricing Forum in Paris on September 24.
Panellists said the varying definitions of management fees placed additional importance on the need for contracts to be as specific as possible about the services the fees are paying for, though there is no guarantee that tax officials in every jurisdiction will respect the terms of the contract.
“Sometimes the only way to make progress in the US is to make sure contracts are comprehensive,” Levey said.
“The role of the contract is extremely important in Russia for tax deductibility and transfer pricing purposes,” said Ruslan Vasutin, a partner of DLA Piper in Moscow.
“There are improvements to be made on being specific as possible in contracts to give tax authorities some comfort on controlling risks and issues,” said Margreet Nijhof, a partner of Baker & McKenzie in Amsterdam.
To deal with the increased attention from tax authorities in the Brics countries of Brazil, Russia, India, China and South Africa, and other emerging economies, some companies have had to revise their transfer pricing policies to comply with the benefit tests relating to management fees that are being applied in those places. Catherine Damelincourt, of Alstom, one of two tax directors from French multinationals on the panel – Francois Gadel of LVMH was the other - said her company was an example of this.
“At the court/tribunal level in India things are more hopeful for decisions favourable to taxpayers,” said Jitendra Jain, vice-president of transfer pricing for GE in India. “At the lower level, of the tax authorities, you often get very detailed questionnaires focusing on various aspects of management fees, including benefits received from management services and they tend to challenge deductibility in the absence of detailed benefits analysis.” Jain pointed out that the American Bar Association’s transfer pricing committee submitted its comments and recommendations for guidance on guarantee fees to the US tax authorities on September 13.
An extra complication, Nijhof said, is that when setting management fees, companies sometimes have to deal with differences of opinion not only with tax officials but also their own staff.
“Sometimes it’s not easy to get local management to agree to a price of an inbound service,” she said.
The panel also covered guarantee fees, where a parent company might, for example, receive a payment from a member of the group for an activity, such as a loan from a bank, it had given some assurance over. Levey pointed out that in the Container Corp case in the US in 2010, where a Mexican parent had guaranteed the issuing of notes by a US subsidiary, the US Tax Court had decided that guarantee fees, which were determined to be “fixed and determinable periodical income”, were a service whose source was the location of its guarantor.
Levey said there was no precise methodology for financial guarantee fees. “They are not totally comparable to the banking system,” Gadel said, “but a support.”
At a time when governments are striving to raise more revenue to plug budget deficits and pay for growth, tax officials can see the potential in denying deductions based on the charging of management and guarantee fees that do not comply with transfer pricing rules. This is likely to be the pattern, in some parts of the world at least, for sometime.
“Performance fees and guarantee fees, and whether taxpayers can defend them, will become more and more important in Russia,” said Vasutin.
“In this world and this economy, tax authorities are not very trusting,” said Levey.
