What Should Hedge Fund Managers Understand About Transfer Pricing and How to Manage the Related Risks?

Hedge fund firms with multinational operations should understand the implications of transfer pricing for their operations.  Transfer pricing establishes the price charged between controlled parties involved in cross-border transfers of goods, intangibles and services, as well as financial transactions (e.g., loans).  While transfer pricing is most often applicable to international transactions involving distinct legal entities within a global group, the concept of “controlled parties” can extend to entities involved in domestic transactions, as well as partnerships and individuals.  Taxing authorities around the world have enacted transfer pricing rules to ensure that income is not arbitrarily shifted to other taxpayers or jurisdictions, and that reported profits are aligned with functions, assets and risks.  The arm’s length standard is the fundamental basis of most transfer pricing law, and seeks to price a transaction between controlled parties as if it occurred between two unrelated parties.  Many countries require taxpayers to maintain documentation to demonstrate that intercompany transactions comply with the arm’s length standard and can impose significant penalties absent this documentation.  As a matter of course, many taxing authorities (including the Internal Revenue Service in the U.S.) request this documentation at the outset of an audit.  In a guest article, Jessica Joy, Stefanie Perrella and Matt Rappaport – Managing Director, Vice President and Analyst, respectively, at Duff & Phelps – present an overview of transfer pricing and relevant U.S. laws.  Further, the authors discuss current events that may be indicative of how lawmakers and regulators will approach transfer pricing for hedge fund firms going forward, and present illustrative transfer pricing issues of particular relevance to hedge fund firms.

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