1. Nexia European tax group meeting - Milan 1st/2nd October 2009 Daniel Althaus ABT Treuhandgesellschaft Andreas Baumann & Co. Zürichstrasse 27b 8134 Adliswil - Zürich

2. Transfer pricing – Hedge fund management fees between Cayman Island fund manager and Swiss / South African (sub) advisor – case study

3. Agenda 1.Current structure 2.Transfer pricing method 3.KERT / functional analysis 4.Selection of transfer pricing method 5.Comparables 6.Transfer pricing risks – example 7.Further tax implications - example (VAT) 8.APA 9.Transfer pricing documentation

4. 1. Current situation  Several Cayman Island funds  Cayman Island fund manager  Swiss fund (sub) advisor  South African (sub) advisor

5. 1. Legal situation Cayman funds Cayman fund manager South African advisor 100% Investors Swiss residents Swiss fund advisor

6. 1. Fee flow  Fund management fee (fund manager)  Performance fee (fund manager)  Advisory fee (fund advisor)  Performance fee (fund advisor)

7. 1. Planned fee flow Cayman funds 1 Cayman fund manager 30 Bps Swiss fund advisor 75 Bps 150 Bps45 Bps 75 Bps 2 1 2 2 Fund management agreement Fund advisory agreement South African advisor 45 Bps

8. 2. Transfer pricing method  Art. 9 OECD MTC “arm’s length principle  OECD Transfer pricing guidelines (for multinational enterprises and tax administrations)  Traditional methods  CUP method  Resale price method  Cost plus method  Other methods  Profit split method  Transactional net margin method  Transactional profit method

9. 3. KERT functions  Key Entrepreneur Risk Taking (“KERT”)  Key value drivers  Portfolio management  Distribution (not part of this analysis)  Functions, assets, risks

10. 3. Functional analysis  Portfolio construction  Research  Marketing /client relations  Risk management  Implementation / trading  Back office

11. 3. Functional analysis (simplified)

12. 3. Risks assumed  Macroeconomic business risk  Performance risk  Contractual risk  Operational risk  Processing /order risk  Regulatory compliance /legal risk  Tax risk

13. 3. Risks assumed (simplified)

14. 3. Assets utilized  Personnel  Investment approach  Brand  Valuation models  Financial models  Information technology

15. 3. Assets utilized (simplified)

16. 3. Alloctation of functions, risks and assets Allocation gives arguments to justify fee flow- especially fees in Cayman. Tax authorties may ask for cost / income ratio documentation. Transfer pricing consequences are low (no double taxation in Cayman) To witholding tax risks

17. 4. Selection of transfer pricing method  USA: “best practice”  OECD: “freedom by corporation to satisfy the arm’s length principle”  Traditional methods  CUP method (comparables)  Resale price method  Cost plus method (low value, supporting functions – back office, accounting)  Other methods  Profit / revenue split method (common method in fund industry)  Unspecified transfer pricing methods possible (mix of cost and revenue share)

18. 5. Comparables  Similar hedge funds  Lipper LANA database  Morningstar’s website  Other database (big four)

19. 6. Transfer pricing risks: Fee flows / contracts Cayman funds 1 South African advisor Swiss fund advisor 2 Seeder fee agreement Investment (seeder) 1 1 2 Cayman fund manager Seeder fees ×

20. 6. Transfer pricing risks: Fee flows / contracts  All contracts with Cayman (important for functional analysis – risk analysis)  No dual contracts (Cayman, Switzerland)  Mix of cost and revenue remuneration versus risk taking – impact on KERT analysis and as a result on fee flow  Cost remuneration – impact on direct taxation versus fee flow (KERT)

21. 7. Further tax implications (VAT) Cayman funds 1 Cayman fund manager 30 Bps Swiss fund advisor 75 Bps 150 Bps 120 Bps 2 1 2 Fund management agreement Fund advisory agreement South African advisor 45 Bps 3 3 Fund sub-advisory agreement ×

22. 7. Furter tax implications (VAT)  VAT input taxation (banking business)  No service imports  Fees /contracts directly from fund or fund manager to fund (sub) advisor  No sub-contracts between Switzerland and South Africa

23. 8. APA (Advance Pricing Arrangement)  Possible and common in Switzerland and South Africa  Complexity involved  Risks involved (double taxation)  Cost factor (TP documentation)  Decision: No APA

24. 9. Transfer pricing documentation  Responsible: Group tax department  Cooperation tax and accounting depts.  Transfer pricing archive  Transfer pricing study  Contracts  Calculations  Audit track to supporting documents  Cost income analysis  APAs

25. Thank you for your attention Daniel Althaus ABT Treuhandgesellschaft Andreas Baumann & Co. Zürichstrasse 27b 8134 Adliswil - Zürich