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Transfer pricing – Management Fees

May 01, 2013  |   Blog,Management Fees   |     |   1 Comment

The transaction

The parent company of a group that operates in the field of high value-added services for operators of a specific sector, following the decision to centralize its executive and strategic services at the headquarter level, arranged the delivery of certain intercompany services for its foreign subsidiaries including the Italian entity.

Shaking hands 1

Activities carried out

Development of an economic analysis on Transfer Pricing designed to support the fair market value (arm’s length) of the management fees  charged to the Italian company from the foreign parent.

Details of the project

In particular the services covered by the analysis were:

a) Coordination activities and managerial support; b) Support activities to develop and implement a strategy for internal and external communications; c) Provision of financial and accounting services; d) Provision of service of internal accounting and administrative control e) Provision of legal assistance and support; f) Assistance in strategic planning; g) Assistance in issues regarding personnel, selection, payroll service and other matters relating to human resources management; h) Support in developing sales and marketing strategies; i)  Consultancy in the tax and treasury management field; j) Supply of accounting services, consulting and assistance in the creation of new strategic research methodologies k) assistance in customer relationship management including claims; l) Supply of administrative services and technical assistance; m) Coordination of third parties’ consulting concerning the matters listed in the previous paragraphs.

Application of the method

Performing a benchmark analysis through an international database used by both the Italian and foreign tax authorities, the transfer pricing economic analysis was carried out through three main phases:

  • Phase 1 – Understanding the Group, in terms of business areas , products / services offered, subsidiaries and their functional analysis; analysis of the  major intergroup agreements, analysis of the Group’s  supply chain and identification of the relevant  transactions pursuant  the TP study;
  • Phase 2 – Choice  the most appropriate transfer pricing methodology, among those recognized by the OCSE and the Italian tax administration, based on companies’ functional and risk profile specifically involved in intercompany transactions, as outlined in the above Phase 1.
  • Phase 3 – Qualitative and quantitative analysis aimed at identifying, through a gradual process of skimming, a sample of comparable firms in terms of functional and risk profile and to determine accordingly  a proper level  of market remuneration for the specific activities carried out.

The analysis was then completed with the identification of a range of market values ​​(interquartile range) in which the Group may determine the arm’s length remuneration  to be applied to the intercompany management fees in place.

As a preferred profit level  indicator mark-up on total costs (“MTC”) was chosen  in order to reflect  the profitability of the functions related to the provision of services. The MTC was calculated with the following formula:

                        Mark Up on Cost = Total Operating Profit / Total Cost

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