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The danger of non-arm’s-length management fees

Management fees present particular difficulties for taxpayers. Whenever an asset management service is performed by a resident of one jurisdiction for a recipient in another there are transfer pricing implications.

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It is understandable that revenue authorities focus so intently on intra-group management fees considering the tax planning opportunities available to taxpayers to lower taxable income by increasing expenses in another jurisdiction.

However, as long as the compensation for these intra-group services can be well-justified on the company’s transfer pricing documentation, these intra-group arrangements can form part of a company’s legitimate tax planning tool box.

A company needs to consider the tax implications on both sides of a transaction because, if adverse tax implications were to arise on any side, group profits can be affected; and so implementing a management-fee policy is advised, ensuring arm’s-length payment at all times.

Designing a policy

The OECD recommends taxpayers determine whether the activities undertaken by a parent company or group services centre genuinely constitute intra-group services (as in whether the payer is receiving a benefit); and then work out how to determine an arm’s-length measurement for the service in light of the benefits received.

The OECD states that a service has been rendered only if the activity provides the respective group member with economic or commercial value that might conceivably enhance the recipient's commercial position. Justification can be brought if it is considered an independent enterprise and would be willing to pay for that service under the same circumstances.

Difficulties arise, however, when it comes to services rendered that are not necessarily chargeable. The OECD stipulates the following services that may fall into this bracket:

  • Shareholder / custodial activities;

  • Duplicative services;

  • Services that provide incidental benefits;

  • Passive association benefits; and

  • On-call services.

Getting answers

As revenue authorities organise and distribute their resources for revenue collection, particularly in terms of transfer pricing, different issues become more of a focus.

International Tax Review and TPWeek are hosting a Global Transfer Pricing Forum on September 24 & 25 in Paris where the issue of management fees, in BRICS and developed countries, is the focus of a panel debate.

Including speakers from GE India, Alstom in France, and advisers from Russia, the US and the Netherlands, the panel will discuss how taxpayers should charge management fees in BRICS countries; what the real global issues are; and what the particular focus of tax authorities is now.

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