How non-OECD members differ in asset management transfer pricing
Marcelo Vicentini of Standard Chartered in Brazil discusses the differences between OECD member countries and non-members when it comes to asset management transfer pricing.
Brazil’s diversion from the OECD is well-documented and can make life difficult for transfer pricing managers when they are trying to apply a consistent policy across a global company. They regularly face serious problems.
Asset management activity in a global company means that you will have different parts of the process performed in different locations, such as fund management, distribution, back office and middle office functions, etcetera.
In order to comply with transfer pricing rules in each location and avoid problems with tax authorities, you should compensate these locations accordingly and hopefully, you should find a consistent transfer pricing method across the group, which will provide you with a better history to report to tax authorities. Notwithstanding, if you have part of these activities performed in Brazil, it will not be possible.
Brazilian transfer pricing rules were designed to cover production of goods activity and were not designed for financial services, especially complex services such as asset management.
Therefore, when a Brazilian team is performing research on local assets to be bought by international funds, for example, it is likely that the only possible method to be applied for this asset management activity is the cost plus method which, according to Brazil rules, should have a fixed margin of 15% plus taxes, independently of the sector or type of activity, which means that transfer pricing rules applicable to the example provided (research on local assets to be bought by international funds) should have, according to the law, the same profitability of a oil extraction.
The fixed margins established by Brazilian rules are clearly in contradiction with OECD guidance which establishes that the margin should be determined by reference to the mark-up that the same supplier earns in comparable uncontrolled transactions (an internal comparable), or by reference to the mark up that would have been earned in comparable transactions by an independent enterprise (external comparable).
In summary, Brazilian rules do not have any flexibility to update the various activities performed in asset management business vis-a-vis the amount to be charged in connection with these services and mark up to be charged.
Thus, if it is the case of your company, having Brazilian entities/teams performing part of the activities, Brazilian rules could jeopardise the consistency of transfer pricing rules across the group, generating exposure to potential issues with tax authorities, even out of Brazil.