Why is Transfer Pricing important for Private Equity Funds?
For private equity funds, transfer pricing is not only key but necessary to ensure your structure is optimized while aligning with international best practices. Our broad private equity client base often tells us that transfer pricing is a top priority because:
The due diligence process focuses heavily on historical transfer pricing approaches applied by the fund, portfolio companies and assets to assess financial health and tax compliance. In many cases, when exiting an investment, transfer pricing policies and overarching approaches to transfer pricing compliance can impact deal pricing or in some cases even lead to deal termination.
Aligning transfer pricing with the fund's operating model, private equity funds can align the overarching strategic goals of the funds with transfer pricing strategy. As such, our clients tell us that transfer pricing is not only a “nice to have” but is essential to drive the success of the business.
In many jurisdictions it is a legal and regulatory requirement to ensure transactions such as intercompany debt and interest, management fees, transaction fees, monitoring fees and origination fees are arm’s length in nature.
Recent tax developments such as Amount B, Pillar 2, Trump tariffs and related supply chain management, make it particularly important for businesses in the private equity space to ensure that the transfer pricing approach adopted is robust and in line with international best practices.
How can Meijburg help?
The KPMG Meijburg Financial Services Transfer Pricing team is market-leading in the private equity sector, bringing cutting edge solutions and market insights to help you on your transfer pricing journey.
Our services include:
Transfer pricing health checks and diagnostic analysis to help align transfer pricing with the business objectives and tax landscape.
The design and implementation of 100-day plans to ensure that when onboarding new assets there is a smooth transition between pre- and post-deal operations.
Transfer pricing policy design to optimize your structure and approach to transfer pricing.
Internal governance and operating frameworks to help ensure that the business prioritizes alignment between transfer pricing and operations.
Implementation support to help you with the practical considerations of putting transfer pricing policies into practice.
Transfer pricing compliance assistance to help with Local Files, Master Files, CbCR and benchmarking.
Our approach to transfer pricing for private equity clients is flexible and customized, driven by the specific needs, culture and strategic goals of our clients. We work with you throughout your private equity transfer pricing lifecycle to review, design and implement a transfer pricing framework and methodology that is future-proof for all your deals as your business grows and evolves within the ever-changing transfer pricing landscape.
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FAQ
Does transfer pricing affect the valuation of private equity investments?
Yes, a fund’s general approach to transfer pricing can significantly affect the valuation of private equity investments, as the buy-side due diligence process is increasingly focused on any risks arising from the transfer pricing methods applied in the past. Therefore, it is crucial to ensure that the fund’s transfer pricing policies and those of its portfolio companies are in line with international best practices.
What are some of the key considerations for tax authorities regarding transfer pricing in the private equity sector?
The main points of attention are: (i) the treatment of management fees from the fund to portfolio management companies; (ii) the pricing of intra-group debt; (iii) fees such as transaction, advisory, and monitoring fees; (iv) the application of group recharges. All of these topics are covered in our article and are part of the ‘point of view’ offering that we recommend during the 100-day plan.
What are the main challenges in implementing transfer pricing policies in private equity portfolio companies?
One of the main challenges is ensuring consistency and compliance with transfer pricing regulations across different jurisdictions, while aligning the fund’s approach to transfer pricing with the methods historically applied by the portfolio companies. This requires a thorough analysis of the value chain from the fund down to the portfolio companies, with a focus on the key functions, risks, and assets at each level.
Do you recommend taking proactive steps to ensure that the transfer pricing approaches applied by new assets are aligned with the fund’s approach to transfer pricing?
Yes, we strongly recommend that funds consider transfer pricing as a key component of their 100-day plan to ensure that historical transfer pricing approaches can be adjusted to align with the fund’s overall transfer pricing strategy. A solution we often see clients in the private equity sector implement is a “point of view,” which provides a bird’s-eye perspective of the fund and new portfolio companies to ensure that any potential risks or gaps are addressed within the first 100 days.
How can private equity funds benefit from transfer pricing strategies?
Private equity firms can benefit from transfer pricing strategies by optimizing tax efficiency and ensuring compliance with transfer pricing requirements in the jurisdictions where they operate. Additionally, private equity funds with a clear internal governance framework will have a robust playbook that can be used on an ongoing basis when acquiring assets, applying international best practices.
What are the documentation requirements for transfer pricing in the context of private equity?
Transfer pricing documentation is crucial to demonstrate that the prices applied to transactions and dealings are at arm’s length and in line with international best practices. Depending on the size of the fund and the respective assets, this may include preparing a master file, local file, and country-by-country reporting, depending on the jurisdiction. Private equity firms should ensure that their portfolio companies maintain this documentation accurately and in a timely manner.
What are the consequences of non-compliance with transfer pricing rules for private equity firms?
Non-compliance with transfer pricing rules can result in significant penalties, tax adjustments, and reputational damage. Private equity firms should be proactive in monitoring and adjusting their transfer pricing policies to minimize risks and ensure compliance with international regulations.
