Can my company charge a management fee to its foreign parent?
It can charge for services it genuinely provides, in either direction. The fee has to stand on three separate footings. First, the service was actually rendered, which means someone did identifiable work for the other company. Second, that work benefited the recipient rather than the shareholder, because costs incurred for ownership reasons are not a service to the subsidiary. Third, the amount charged is what independent parties would have agreed for the same work. A fee that fails any one of those will not be defended by the fact that the other two are satisfied.
What records do I need to support an intercompany management fee?
Enough to show a reader who was not there what was done, for whom, and why the amount is what it is. In practice that means a record of the activity itself, some measure of the effort or cost behind it, a description of what the receiving company got out of it, and the reasoning that connects those to the charge. The crucial quality is timing. Records assembled while the work happens describe what happened. Records assembled after an enquiry describe what someone remembers, and the difference is visible on the page.
Why was our management fee disallowed after an audit?
Usually one of three reasons, and it is worth knowing which. The examiner could find no evidence the work was done, in which case the charge looks like a transfer of profit with nothing behind it. Or the work was done but it served the shareholder's interest in monitoring its investment rather than the subsidiary's operations. Or the work and the benefit were both accepted but the amount was not what independent parties would have agreed. The remedy is different in each case, so the first task after a disallowance is establishing which ground it rests on.
Is a board minute and an invoice enough to support the charge?
No, though both belong in the file. A minute records that the charge was approved and an invoice records that it was raised. Neither says what work was performed, who performed it, which company benefited from it, or how the amount relates to the effort behind it. Those are the questions actually asked. A file containing only an approval and an invoice describes the accounting entry rather than the transaction, which is the precise weakness in a charge that moves profit between companies without anything physical crossing a border.
Can I prepare transfer pricing documentation after the year end?
You can write it whenever, but what makes documentation useful is that it was prepared alongside the transaction rather than in response to a question about it. Contemporaneous material is what converts a policy into a defence, because it shows the reasoning that was applied at the time rather than the reasoning constructed to justify the result. Late documentation is still better than none, and it is often the only option for closed years. It should say honestly what it is, because a file presented as contemporaneous when it is not damages everything around it.
What is the difference between a shareholder cost and a real service?
Ask who would have paid for it if the companies were unrelated. Work done so the parent can monitor, consolidate or report on its investment is a cost of being an owner, and an independent company would not have paid a supplier to do it. Work the subsidiary would otherwise have bought in or done itself, such as a payroll function, a technical service or a negotiation carried out on its behalf, is a real service. The same activity can fall on either side depending on who it was for, which is why the file has to record the purpose rather than only the task.
What is a transfer pricing policy, and is it the same as documentation?
No. The policy is the forward-looking statement of how your intercompany prices are set — which method for which transaction, which comparables, what happens when margins drift. The documentation is the backward-looking evidence that the policy was applied and produced an arm's length result for that year. Authorities read both, and a policy that the intercompany invoices do not actually follow is worse than none, because it establishes what you knew you should have done. See do you need documentation.
Which business structure has double taxation?
The corporation — specifically a US C corporation, where profit is taxed to the company and the dividend again to the shareholder. Sole proprietorships, partnerships and LLCs treated as flow-throughs are taxed once, in the owners' hands. Across borders that tidy answer breaks: an entity treated as a flow-through in one country can be opaque in the other, which produces a mismatch neither system planned for. See LLC against corporation for Canadians.
