Nexia European tax group meeting - Milan1st/2nd October 2009

Daniel Althaus

ABT TreuhandgesellschaftAndreas Baumann & Co.Zürichstrasse 27b8134 Adliswil - Zürich

Transfer pricing – Hedge fund management fees between Cayman Island fund manager and Swiss / South African (sub) advisor – case study

AgendaAgenda

1. Current structure

2. Transfer pricing method

3. KERT / functional analysis

4. Selection of transfer pricing method

5. Comparables

6. Transfer pricing risks – example

7. Further tax implications - example (VAT)

8. APA

9. Transfer pricing documentation

1. Current situation1. Current situation

Several Cayman Island fundsCayman Island fund managerSwiss fund (sub) advisorSouth African (sub) advisor

1. Legal situation1. Legal situation

Caymanfunds

Cayman fund manager South African advisor

100% 100%

Investors Swiss residents

Swiss fund advisor

1. Fee flow1. Fee flow

Fund management fee (fund manager) Performance fee (fund manager)

Advisory fee (fund advisor)Performance fee (fund advisor)

1. Planned fee flow1. Planned fee flow

Caymanfunds

1

Cayman fund manager

30 Bps

Swiss fund advisor

75 Bps

150 Bps 45 Bps

75 Bps

2

1 2

2

Fund management agreement

Fund advisory agreement

South African advisor

45 Bps

2. Transfer pricing method2. Transfer pricing method

Art. 9 OECD MTC “arm’s length principleOECD Transfer pricing guidelines (for multinational

enterprises and tax administrations)

Traditional methods CUP method Resale price method Cost plus method

Other methods Profit split method Transactional net margin method Transactional profit method

3. KERT functions3. KERT functions

Key Entrepreneur Risk Taking (“KERT”)Key value drivers Portfolio management Distribution (not part of this analysis)

Functions, assets, risks

3. Functional analysis3. Functional analysis

Portfolio construction Research Marketing /client relations Risk management Implementation / trading Back office

3. Functional analysis (simplified)3. Functional analysis (simplified)

Functions Cayman Switzerland South Africa

Portfolio construction 1 4 0Reserach 0 2 2Marketing/ client relations 1 4 0Risk management 0 1 4Implementation / trading 1 4 1Back office 4 0 0

7 15 724% 52% 24%

04

Low level of performanceHigh level of performance

3. Risks assumed3. Risks assumed

Macroeconomic business risk Performance risk Contractual risk Operational risk Processing /order risk Regulatory compliance /legal risk Tax risk

3. Risks assumed (simplified)3. Risks assumed (simplified)

Risks Cayman Switzerland South Africa

Macroeconimc business 2 2 2Performance 4 1 1Contractual 4 1 1Operational 2 2 2Processing / order 4 4 1Regulatory compliance / legal 2 2 1

18 12 847% 32% 21%

04

Low level of riskHigh level of risk

3. Assets utilized3. Assets utilized

Personnel Investment approachBrand Valuation modelsFinancial models Information technology

3. Assets utilized (simplified)3. Assets utilized (simplified)

Assets Cayman Switzerland South Africa

Personnel 1 8 4Investment approach 3 1 1Brand 3 1 1Valuation models 2 2 2Financial models 2 2 2Information technology 2 2 1

13 16 1133% 40% 28%

08

Low level of assetsHigh level of assets

3. Alloctation of functions, risks and assets3. Alloctation of functions, risks and assets

Allocation gives arguments to justify fee flow- Allocation gives arguments to justify fee flow- especially fees in Cayman.especially fees in Cayman.

Tax authorties may ask for cost / income ratio Tax authorties may ask for cost / income ratio documentation.documentation.

Transfer pricing consequences are low (no double Transfer pricing consequences are low (no double taxation in Cayman)taxation in Cayman)

To witholding tax risks To witholding tax risks

4. Selection of transfer pricing method4. Selection of transfer pricing method

USA: “best practice” OECD: “freedom by corporation to satisfy the arm’s

length principle”

Traditional methods CUP method (comparables) Resale price method Cost plus method (low value, supporting functions – back office, accounting)

Other methods Profit / revenue split method (common method in fund industry) Unspecified transfer pricing methods possible (mix of cost and revenue share)

5. Comparables5. Comparables

Similar hedge funds Lipper LANA database Morningstar’s website Other database (big four)

6. Transfer pricing risks: Fee flows / contracts6. Transfer pricing risks: Fee flows / contracts

Caymanfunds

1

South African advisor

Swiss fund advisor

2

Seeder fee agreement

Investment (seeder)

1

1

2

Cayman fund manager

Seeder fees×

6. Transfer pricing risks: Fee flows / contracts6. Transfer pricing risks: Fee flows / contracts

All contracts with Cayman (important for functional analysis – risk analysis)

No dual contracts (Cayman, Switzerland)

Mix of cost and revenue remuneration versus risk taking – impact on KERT analysis and as a result on fee flow

Cost remuneration – impact on direct taxation versus fee flow (KERT)

7. Further tax implications (VAT)7. Further tax implications (VAT)

Caymanfunds

1

Cayman fund manager

30 Bps

Swiss fund advisor

75 Bps

150 Bps

120 Bps

2

1

2

Fund management agreement

Fund advisory agreement

South African advisor

45 Bps

3

45 Bps

3 Fund sub-advisory agreement

×

7. Furter tax implications (VAT)7. Furter tax implications (VAT)

VAT input taxation (banking business) No service imports Fees /contracts directly from fund or fund

manager to fund (sub) advisor No sub-contracts between Switzerland and

South Africa

8. APA (Advance Pricing Arrangement)8. APA (Advance Pricing Arrangement)

Possible and common in Switzerland and South Africa

Complexity involved Risks involved (double taxation) Cost factor (TP documentation)

Decision: No APA

9. Transfer pricing documentation9. Transfer pricing documentation

Responsible: Group tax department Cooperation tax and accounting depts. Transfer pricing archive Transfer pricing study Contracts Calculations Audit track to supporting documents Cost income analysis

APAs

Thank you for your attention

Daniel Althaus

ABT TreuhandgesellschaftAndreas Baumann & Co.Zürichstrasse 27b8134 Adliswil - Zürich