Transfer Pricing in Private Equity: Key findings from KPMG’s global transfer pricing survey
Topics: Private Equity, Transfer Pricing
Introduction
KPMG Luxembourg recently published the second edition of its Transfer Pricing (“TP”) Asset Management Survey, expanding the study further from a European initiative (first edition published in February 2024) to a global benchmark covering Europe, North America and other regions. This global survey drew responses primarily from global asset managers and managers within banks or insurance groups.
This global survey provides insights into how asset managers approach TP across several core areas such as documentation, policies and models, and the management and resolution of audits. The findings indicate that the approaches to TP policies and documentation are comparable across Europe and North America. Although audit practices and the level of enforcement differ by jurisdiction, firms in both regions tend to share some of the underlying policy choices and documentation approaches.
Here is the summary of the main findings and practical implications for private equity managers and their finance and tax teams.
Organizational size
The survey covers a broad section of the asset management industry, from firms managing around EUR20 billion in assets under management (“AUM”) to large global institutions with AUM about EUR2,000 billion. Respondents include asset managers as well as those that form part of banking or insurance groups. Although larger firms may have a different level of governance and outsourcing, the findings suggest that TP approaches are consistent across organizations of all sizes. In practice, regardless of the size, firms are expected to apply the same fundamentals of policy robustness and documentation quality.
TP policies
About 80% of the respondents stated that they have a written TP policy in place, which is reviewed/reassessed once every three years or during events such as reorganization or shift in business models.
Although skipping annual reviews of the policies is common, majority of the private equity players implement strict governance.
Documentation expectations
TP documentation varies across organizations. The survey shows that 84% of respondents prepare either a formal local file (as per the OECD guidelines) that covers key intra‑group transactions or a transactional report for a single intra‑group transaction. This suggests that most firms are usually prepared to provide the documentation to tax authorities when requested. In today’s market, however, organizations are expected to provide contemporary TP documentation. Firms that fail to present with adequate information are outliers.
Among private equity firms, there is a distinction between corporate and fund (deal) segment of the business. While formal local files are often prepared for transactions within the corporate structure, a more transaction-specific approach is adopted in the deal segment, often documenting intra-group loans on a standalone basis.
Almost 90% of participants reported having intercompany agreements for all intra‑group transactions, an increase from the percentage mentioned in the prior edition of the survey. This reflects not only a strong focus on maintaining legal documentation but also ensuring terms and conditions reflect market standards.
TP audits
Almost 60% of respondents reported having a TP audit in Europe in the last five years, representing a 6% increase, compared with that in the first edition of the survey. In the private equity sector, financing, portfolio management and investor relationship/capital remain the focus areas for tax authorities.
Financing transactions account for half of all TP audits. While the focus remains on the arm’s length nature of the interest rate, tax authorities also examine the debt capacity of the borrowing entity, a trend that only continues to rise.
Tax authorities are increasingly monitoring the location of investment committee members and senior executives, the design of incentive and bonus schemes, and whether key decision makers are based in a jurisdiction where significant value is created. If compensation arrangements or formal decision‑making requirements show an individual in a particular jurisdiction performing critical functions such as investment selection, monitoring or exit decisions, authorities expect more profits in that jurisdiction. Clear documentation of roles and decision‑making processes are key to supporting the group’s TP position and reduce risk challenges.
Approximately 60% of the TP audits reported in the survey resolved through settlement, within 2 years of the first information request. In many cases, settlements reflect commercial choices driven by cost, speed and business constraints such as asset disposals or ongoing transactions.
About 9% of the audited cases reported criminal procedures being invoked. Criminal procedures are sometimes deployed as pressure tactics to expedite settlements and can be detrimental to both individuals and entities, especially where governance and administrator responsibilities intersect. This means one thing for managers and the boards: even though robust documentation and strong governance mitigate the risk of escalation to criminal proceedings, they do not entirely eliminate it.
“Tax authorities are increasingly monitoring the location of investment committee members and senior executives, the design of incentive and bonus schemes, and whether key decision makers are based in a jurisdiction where significant value is created.”
MAPs and bilateral APAs
The survey highlights a notable increase in the use of Mutual Agreement Procedures (“MAPs”) by groups to resolve TP disputes arising from audits, particularly in cases involving residual profit allocation, fee‑sharing between jurisdictions and TP methods used for portfolio management or distribution activities. Luxembourg has emerged as a central jurisdiction for these MAP discussions as one of the leading fund and management hubs, the concentration of alternative investment fund managers (“AIFMs”), and its extensive treaty network.
In addition, Bilateral Advanced Pricing Agreements (“BAPAs”) are used to obtain greater certainty on method selection (e.g. validating a profit split or a fee‑sharing mechanism tied to total asset management fees) and the attribution of portfolio management functions and related residual profits. Owing to the technical complexity and cross‑border sensitivities in private equity, as well as a compelling EU directive, the use of MAPs (sometimes followed by BAPAs) is becoming an important tool to align the allocation of value with where key value‑creating decisions are demonstrably taken.
TP policies and method selection
The cost-plus method is widely used for back‑office and routine support functions. However, its application is coming under greater scrutiny where activities mostly contribute to value creation, such as portfolio management, cross‑border investment advisory services and distribution/capital raising where more than half of participants reported either the use of a profit or fee split.
Within the alternative investment industry, there is a clear shift away from traditional cost-plus models for AIFMs. Instead, many are retaining a percentage of the total asset management fee (or applying a profit‑split/fee‑split) that aligns more closely with fund performance and the value generated.
Key learnings and practical takeaways from this year’s survey
The findings of the second edition of this KPMG TP survey show convergence: firms across the world, regardless of their size, face similar TP pressures and trade-offs. For private equity managers, the emphasis has shifted from having a TP policy to ensuring its supported by documentation and governance.
A few practical actions for private equity managers:
- Ensure that a proper documented TP policy is in place and schedule regular reviews.
- Strengthen or implement a TP governance framework that embeds commercial decision criteria (cost, timing, asset disposals), formalize processes for collecting, storing and retrieving TP data, and supporting evidence in case of TP audit.
- Prepare contemporaneous, transaction‑proportionate TP documentation. Conduct a risk assessment to determine whether formal local files are advisable in specific jurisdictions (e.g. for penalty protection).
- Reassess the method selection for functions that create value and consider profit/fee split approaches where decision‑making and economic returns are shared across jurisdictions.
Authors
Sophie Boulanger
Partner, Head of Transfer Pricing
KPMG
