Rethinking transfer pricing for asset managers

Asset management regulatory environment

The regulatory environment for Irish asset managers has shifted dramatically over the last 10 years. The release of CP86 by the Central Bank of Ireland fundamentally changed the dial on the level of substance, oversight and functions required to be carried out by fund management companies which, in some cases, historically operated without a material level of in-country regulatory substance.

In tandem with regulatory developments, the international tax landscape has also changed signiﬁcantly – the OECD’s Base Erosion and Proﬁt Shifting initiative has placed a heightened focus on where proﬁts are booked supplemented by the release of various OECD transfer pricing guidance updates.

These updates have not only introduced greater documentation requirements, but have also clariﬁed the application of methodologies, ensuring that transfer pricing outcomes align with economic reality and that proﬁts are properly allocated to value-creating activities.

The combined effect of the above directly impacts how management fee arrangements should be structured, documented, and defended from a transfer pricing perspective.

Philip Murphy

Partner, Head of Asset Management Tax

KPMG in Ireland

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The substance imperative:
Beyond box-ticking

Historically, many asset managers relied on cost-plus models to price intra-group management and support services. These approaches, often based on administrative simplicity, are increasingly out of step with both regulatory expectations and the realities of value creation in today’s asset management industry.

Regulatory requirements now necessitate demonstrable substance – clear evidence that the Irish management company is not merely a conduit, but a genuine centre of decision-making, risk management, and value generation.

The operations of most asset managers typically span multiple jurisdictions and rely on a range of different group entities for portfolio management, risk management, valuation, distribution and operational support.

Each of these functions contributes to value creation across the group, leading to inherent transfer pricing complexity. As a result, the way fees and responsibilities are allocated between related entities becomes a central consideration.

Where activities are delegated to related entities, asset managers must ensure that the intra-group arrangements comply with the arm’s length principle and are supported by a robust functional and risk analysis that demonstrates each party’s contribution to the fund’s management and operations, as well as the corresponding arm’s length compensation.

Proﬁt split: The emerging standard

The profit split method is increasingly viewed as a more accurate transfer pricing method for asset managers to support an appropriate allocation of profits within the group, particularly where key value drivers such as investment management, risk management and proprietary investment strategies are shared across group entities.

In contrast, a cost-plus framework can undervalue the contribution of an Irish asset management company or lead to outcomes that are misaligned with substance, whereas a profit split methodology may better align profits with the actual functions performed, assets used and risks assumed.

This type of approach is more suitable in circumstances where multiple entities contribute to non-routine value, functions and risks are shared across jurisdictions, with the fund management company responsible for oversight and governance responsibilities.

This is the feature of many fund management arrangements, particularly where delegation arrangements create an interconnected value chain. In such cases, a profit split methodology may provide a more reliable and defensible way of reflecting how value is created across the group.

The transfer pricing methodology followed should reflect the level of responsibilities and risks borne by the asset management company and be aligned with its regulatory position, including any Central Bank authorisations and governance requirements.

VAT: a hidden trap in transfer pricing adjustments?

When considering any transfer pricing policy, it is important to assess any VAT considerations associated with the policy and related adjustments.

VAT is usually a cost to operators in the asset management sector and the VAT impact is an important consideration

in designing any transfer pricing policy and in considering any adjustments arising under established transfer pricing policies. This is particularly relevant give the significant outsourcing of services within groups in the sector.

Inadequate planning and attention from a VAT perspective VAT can represent a potential missed opportunity or even worse, can cause cash tax leakage in a business structure that might be otherwise be mitigated through alternative arrangements.

A number of recent EU VAT Court decisions have placed more focus on the VAT treatment of transfer pricing adjustments including at tax authority level. These decisions, particularly the decision in Arcomet Towercranes, reaffirm the principle that transfer pricing adjustments can be VATable where they represent consideration for a specific supply and reciprocity between the payor and payee.

This underscores the growing need to assess transfer pricing driven fee readjustments or allocations recognising both the associated risks and potential opportunities from a VAT perspective.

What should asset managers do now?

Revisit functional analysis

Map out in detail where key investment, risk, and client servicing functions are performed; and by whom. This will be a key driver of any transfer pricing fee methodology.
Choose the correct transfer pricing approach

Consider whether profit split (rather than cost-plus) better reflects the economic contributions of the Irish management company and related entities.
Align transfer pricing and VAT

Ensure that fee arrangements and any transfer pricing adjustments are reviewed for VAT implications, including possible exemption status and input VAT recovery.
Document, Document, Document

Prepare robust, contemporaneous documentation—functional analysis, benchmarking, intercompany agreements, and VAT analyses—to support your positions in the event of audit or challenge.