Transfer pricingfor the Family Office

What are the benefits of atransfer pricing analysis?Family offices are established to provide servicesthat are tailored to the family's needs anddesires. While a family office is created to serveone or multiple generations, the goal is to createa business organization that is appropriatelycompensated for the customized services it deliversto the individuals, entities, or trusts (Clients) relatedto the family.The family office is often owned by family membersor trusts for the benefit of family members. Giventhe related party interactions between the familyoffice and the Clients it serves, there is a risk thatthe Internal Revenue Service (“IRS”) could challengethe compensation charged by the family office forthe services it provides.For example, pricing for services provided to familymembers that is lower than market rates mayresult in a deemed gift between family members.Alternatively, pricing for services provided to aprivate foundation or charitable trust that is higherthan market rates could be interpreted to be an actof self-dealing, which may result in the impositionof an excise tax. As such, the family office and theClients it serves are both motivated to determinemarket-based compensation that is comparable tothat charged by an unrelated third party.2The Treasury Regulations under Internal Revenue Codes(IRC) §482 and §6662 govern how to establish anddocument pricing between taxpayers under commoncontrol (controlled service transactions). During anexamination, the IRS may request the support anddocumentation for payments made between related parties.A transfer pricing analysis and supporting documentationcan support the pricing charged and mitigate penalties ifthe IRS successfully challenges the amounts charged. Riskmitigation is the primary benefit of a transfer pricing studybased on IRC §482 and §6662 guidance.

What triggers transferpricing considerations?Services Provided by a Family OfficeMany of the services a family office provides can be analyzed anddocumented using methods provided in IRC §482, including:Transfer pricing for the family officeCommon Family Office Structures & ArrangementsThe diagram below is representative of many family officestructures whereby the family office provides accounting,administrative and investment management services toindividuals, trusts, entities, and foundations related to the family.Private trustcompany (PTC)Administrativeservicesprovided byFO for a sAdministrativeservices providedby FO for a feeTrustee servicesprovided by PTCfor a trustee feeFamily ce (FO)TrustsGeneralPartnerServices provided by FOfor management feeand/or profits allocationLimitedpartnersMarketable LPPrivate LP3

Which method fits your family office?IRC §482 provides six alternative methods that can be used to benchmark and document transfer pricing forvarious controlled services transactions. Deloitte can provide guidance to the family office in the selection andapplication of the best method for the services being provided. Once the right method for a service is determinedby the family office, the method should be applied in a consistent and reliable manner.Comparable Profits Method (CPM)Cost of Services Plus Method (CSP)Evaluates whether the price charged in a controlledservices transaction is at arm's length based on measuresof profitability derived from uncontrolled taxpayers thathave comparable functional and risk profiles. This methodcompares profitability of the controlled service provider(the family office) to profitability of comparable companiesthat perform similar services.Evaluates the arm's length nature of the price chargedin a controlled services transaction by reference to thegross profit mark-up realized in comparable uncontrolledservices transactions. This method is often applied if theservice provider (the family office) provides the same orsimilar service to both controlled and uncontrolled parties.Comparable Uncontrolled Service PriceMethod (CUSP)Service Cost Method (SCM)Evaluates whether the price charged in a controlledservices transaction is at arm's length by comparing it tothe price charged in a comparable uncontrolled servicestransaction for the same services.Evaluates the arm's length nature of the servicestransactions by reference to the total cost of providingthe services, with no mark-up. The service provider needsto meet specific tests to support a zero mark-up pricingarrangement.Profit Split Methods (PSM)Gross Services Margin Method (GSM)Evaluates profit allocation between the family office andthe Clients based on the notion that income should beshared by related parties by reference to the relative valueof each party's contribution.Evaluates whether the price charged in the controlledservices transaction is at arm's length by reference tothe gross profit margin in comparable uncontrolledtransactions involving similar services.4

Transfer Pricing: The Stepsto Get You ThereTransfer pricing for the family officeDeloitte’s transfer pricing methodology is based on fact gathering, extensive knowledge of the family office environment,and experience in analyzing related party services arrangements. Our analysis is supported by large databases of marketpricing data to benchmark related party compensation practices. This results in a set of actionable recommendations forthe family office. We present our fact gathering, analysis, and recommendations in a report which can be used during theIRS audits to provide extensive support for positions taken on the tax return. If the report is prepared contemporaneousto filing the US tax return, it can also provide transfer pricing penalty protection.Steps12345Business and Functional AnalysisThe first step includes interviews with family office executives who provide beneficial services to familymembers or to entities controlled by family members. The purpose of the fact gathering step is tounderstand the services offered by the family office and to whom those services are provided, as wellas how the family office is currently compensated for its services. From these discussions, Deloitte willdetermine the controlled services transactions that will be evaluated through the transfer pricing analysis.Industry AnalysisThe second step is to use various public sources to identify and analyze industries, which provide similarservices to the ones provided by the family office. This helps to identify the relevant benchmarks.Market BenchmarkingDepending on the services provided by the family office’s operations, there may be one or multiplebenchmarks. This is determined after the fact gathering stage is concluded.Method SelectionIRC §482 provides six “specified methods” for controlled service transactions. Deloitte will works with thefamily office to select the best method depending on the service being provided.DocumentationA transfer pricing report will be prepared to summarize the controlled services transactions analyzed, theindustry analysis, the benchmarks selected and applied, and the methods ultimately used to determinethe pricing for services. The transfer pricing report should be updated every thre to four years, unless theoperations of the family office change substantially and/or new services are added.5

How can Deloitte help?Deloitte has been discreetly serving high net worth individuals, families, and theirenterprises for more than 100 years. As a trusted advisor to many of the world’s mostaffluent families, family offices and private trust companies, we bring significant experienceand integrated service capabilities to our clients. We deliver a global network of resourcesand a world-class level of knowledge and experience tailored to each family’s unique andpersonal circumstances.Our experience in this specialized field informs us that clients like you expect serviceproviders to bring to the table a team of professionals with relevant experiences andperspective. One of the valuable benefits we can bring to you is our experience workingwith clients of similar stature, complexity, and issues. Our goal is to leverage the deepexperiences of our professionals to advise you and your family for generations to come.Whether you are growing or selling your business, considering what assets you want topass to future generations and charities, or evaluating the creation of a family office, we willshare our knowledge and experiences so that you can feel educated and confident in thedecisions you make to secure the legacy of your family.To find a member of the Private Wealth group who specializes in your areaof interest, please contact us at [email protected] tax and wealth planning resources:Private Wealth — Materials focused on taxand wealth planning issues for individuals,trusts, family offices, and related entities.Deloitte Growth Enterprise Services —Cross-functional resources specific to privatelyheld and mid-market [email protected] — Knowledge when you need it.Instantly link to the latest insights from DeloitteTax on your iPhone, iPad, or Android [email protected] — Sharing news and insights tokeep you in front of tax developments. Follow uson Twitter today.Tax News & Views — Published by the DeloitteTax LLP Tax Policy Services group in Washington,D.C., this newsletter provides a compact, readerfriendly perspective on the latest corporatetax developments coming out of Congress, theInternal Revenue Service (IRS), the Departmentof the Treasury, and the federal courts.Private Companies Dbriefs webcast series— Webcasts focused on topics of interest toprivately held and mid-market companies andtheir owners.

ContactsElla Mimo, PhDManaging DirectorDeloitte Tax LLPChicago, IL 60606 1 312 486 [email protected] pricing for the family officeWendy DiamondPartnerDeloitte Tax LLPChicago, IL 60606 1 312 486 [email protected]

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to the family. The family office is often owned by family members or trusts for the benefit of family members. Given the related party interactions between the family office and the Clients it serves, there is a risk that the Internal Revenue Service ("IRS") could challenge the compensation charged by the family office for