26. ASSET Co is the parent company of an MNE group that provides asset management services to unrelated parties. It has two subsidiaries, Company A in Country A and Company B, in Country B.
27. FUND Co is an independent asset management company that offers collective investment vehicles to retail investors in Country A and Country B. The investment vehicles commercialised by FUND Co are mirror funds that contain equity holdings from both Country A and Country B.
28. FUND Co hires ASSET Co to provide portfolio management services for the funds. FUND Co pays ASSET Co a fee based on the combined assets under management of the funds sold to retail investors in Country A and Country B.
29. ASSET Co enters into a contract with Company A and Company B such that both companies will provide the portfolio management services. Company A employs portfolio managers who specialise in Country A equity and Company B employs portfolio managers who specialise in Country B equity. ASSET Co acts as a nominee for Companies A and B. It does not perform any functions in relation to the FUND Co contract, nor has it contributed any assets or assumed any risks.
30. An investment management committee composed of equal numbers of portfolio managers from Company A and Company B decides on the funds’ investment management. This committee meets regularly and determines the composition of the funds. The composition of the funds between equities of countries A and B will vary according to the decisions of the committee.
31. The functional analysis concludes that the economically significant risk in relation to the transaction relates to retail investors withdrawing their deposits from the FUND Co mirror funds, in particular as a result of poor performance. In accordance with the risk analysis framework described in Section D.1.2.1 of Chapter I of these Guidelines, it is determined that Company A and Company B share the assumption of risks related to the performance of the funds and perform the portfolio management services in a highly integrated fashion.
32. While Company A and Company B provide valuable services, an active arm’s length market for portfolio management services indicates that these services are not unique. Comparables for such portfolio management services (i.e. the services performed by Company A and B together) may be available, but would provide no information on how to split the arm’s length fee between Company A and Company B.
33. Under these circumstances, the transactional profit split method is found to be the most appropriate method for determining the compensation for Company A and Company B as their operations are highly integrated and interdependent such that it is not possible to use a one-sided method to determine an arm’s length outcome for either of their respective contributions. The arm’s length fee received by ASSET Co from FUND Co will form the revenue portion of the relevant profits to be split between Company A and Company B. The arm’s length compensation to ASSET Co will be zero.