June 2018 the OECD released revised guidance on the profit split method. The new guidance will be incorporated into the OECD Transfer Pricing Guidelines, replacing the previous text on the transactional profit split method in Chapter II. The revised guidance retains the basic premise that the profit split method should be applied where it is found to be the most appropriate method to the case at hand, but it significantly expands the guidance available to help determine when that may be the case. It also contains more guidance on how to apply the method, as well as numerous examples.
Related Guidelines
- TPG2022 Chapter II paragraph 2.123A weakness of the transactional profit split method relates to difficulties in its application. On first review, the transactional profit split method may appear readily accessible to both taxpayers and tax administrations because it tends to rely less on information about independent enterprises. However, associated enterprises and tax administrations alike...
- TPG2022 Chapter II paragraph 2.120The transactional profit split method can also provide a solution for highly integrated operations in cases for which a one-sided method would not be appropriate. See Section C.2.2.2, below....
- TPG2022 Chapter II paragraph 2.119The main strength of the transactional profit split method is that it can offer a solution for cases where both parties to a transaction make unique and valuable contributions (e.g. contribute unique and valuable intangibles) to the transaction. In such a case independent parties might effectively price the transaction in...
- TPG2022 Chapter II paragraph 2.118While there is no requirement in these Guidelines to undertake exhaustive analysis or testing of every method in each case, the selection of the most appropriate method should take into account the relative appropriateness and reliability of the selected method as compared to other methods which could be used....
- TPG2022 Chapter II paragraph 2.114The transactional profit split method seeks to establish arm’s length outcomes or test reported outcomes for controlled transactions in order to approximate the results that would have been achieved between independent enterprises engaging in a comparable transaction or transactions. The method first identifies the profits to be split from the...
- TPG2022 Chapter II paragraph 2.115References to “profits” in this section should generally be taken as applying equally to losses. That is, where a transactional profit split method is determined to be the most appropriate method, it should generally also apply, and apply in the same way, regardless of whether the transaction(s) result in a...
- TPG2022 Chapter II paragraph 2.116As is noted in paragraph 2.2, the selection of a transfer pricing method always aims at finding the most appropriate method for a particular case, taking into account the respective strengths and weaknesses of each method, its appropriateness in view of the nature of the accurately delineated controlled transaction, the...
- TPG2022 Chapter II paragraph 2.117Guidance on how to determine whether the transactional profit split method is likely to be the most appropriate method is set out below, including the identification of certain features of a transaction which may be relevant. However it is important to note that there is no prescriptive rule for establishing...
- TPG2022 Chapter VI paragraph 6.212In appropriate circumstances, transfer pricing methods or valuation techniques not dependent on the identification of reliable comparable uncontrolled transactions may also be utilised to determine arm’s length conditions for the sale of goods or the provision of services where intangibles are used in connection with the transaction. The alternative selected...
- TPG2022 Chapter VI paragraph 6.211In applying a profit split method in a case involving the use of intangibles, care should be taken to identify the intangibles in question, to evaluate the manner in which those intangibles contribute to the creation of value, and to evaluate other income producing functions performed, risks assumed and assets...