Transfer pricing for the family office
Can your family office benefit from a transfer pricing analysis?
Family offices commonly deal with transactions between related parties that need to be supportable as "arm's length" for both Internal Revenue Service (“IRS”) standards and to determine objectivity between related members. A transfer pricing analysis and supporting documentation can support the compensation the family office receives for services provided. It can also mitigate penalties if the IRS successfully challenges the amounts charged. Deloitte's latest report outlines the alternative methods, defined under Section 482 of the Internal Revenue Code, which can be used to benchmark and document transfer pricing for various controlled service transactions.
What are the benefits of a transfer pricing analysis?
Given the related party interactions between the family office and the Clients it serves, there is a risk that the IRS could challenge the compensation charged by the family office for the services it provides.
For example, pricing for services provided to family members that is lower than market rates may result in a deemed gift between family members. Alternatively, pricing for services provided to a private foundation or charitable trust that is higher than market rates could be interpreted to be an act of self-dealing, which may result in the imposition of an excise tax. As such, the family office and the clients it serves are both motivated to determine market-based compensation that is comparable to that charged by an unrelated third party.
The treasury regulations under Internal Revenue Codes (IRC) §482 and §6662 govern how to establish and document pricing between taxpayers under common control (controlled service transactions). During an examination, the IRS may request the support and documentation for payments made between related parties. A transfer pricing analysis and supporting documentation can support the pricing charged and mitigate penalties if the IRS successfully challenges the amounts charged. Risk mitigation is the primary benefit of a transfer pricing study based on IRC §482 and §6662 guidance.