Transfer pricing methodology in Management Fee agreements could turn to be very problematic for related party transactions. The main reason is that the agreements are not usually based on specific financial terms, but the service provider is charging a gross amount on a monthly on annual basis, without provisioning the amount of work which is required.
A best practice agreement would use an acceptable methodology to support the billing scheme such as:
- A) Hourly charge
A management fee which is provided by a company with 3 employees, who are working full-time for 220 euros per hour for 8 hours per day for 25 days per week, could make a whopping total of € 132.000 per month and € 1.584.000 per year.
An hourly charge in order to be accepted within the appropriate quartiles would require that the type of work can be justified for € 220 per hour.
- B) Project based
Project based billing schemes are usually tricky, especially when the project is not well documented between the related parties. For instance, an ISO Qualification consultancy can not be validated on a success fee, when the essence of the work is not specified.
- C) Commission based
Commission based charges have better changes to get approved and they are commonly recommended by our Transfer Pricing experts. The reason is that there are chances that the charges can be cross checked with similar transactions outside the group of companies. Ex. agent fees in property deals vary from 0,5% to 5% based on reliable benchmarking data.
A person with an ordinary skill in the art would firstly seek to find evidences of the intragroup transaction from the agreements between the related parties. A cost based approach from the service provider will provide a basis for appreciating the business and turn the focus on a mark-up approach.
Then, if none of the methodologies would apply, you need to use benchmarking data and examine if the quartiles provide a reliable background for the transactions.
It is always very important to describe the business of each party and fit the management fees within the operations.