TPG2022 Chapter II paragraph 2.147

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Category: OECD Transfer Pricing Guidelines (2022), TPG 2022 Chapter II: Transfer Pricing Methods | Tag: , , , , , ,
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Under the transactional profit split method, the relevant profits are to be split between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm’s length. In general, the determination of the relevant profits to be split and of the profit splitting factors should be:

  • consistent with the functional analysis of the controlled trans- action under review, and in particular reflect the assumption of the economically significant risks by the parties, and
  • capable of being measured in a reliable manner.

Related Guidelines

TPG2022 Chapter II Annex II example 1474. Below are some illustrations of the effect of choosing a measure of profits to determine the relevant profits to be split when applying a transactional profit split Scenario 1 74. Assume A and B are two associated enterprises situated in two different tax jurisdictions. Both manufacture the same widgets...
TPG2022 Chapter II Annex II example 1151.  The success of an electronics product is linked to the innovative technological design both of its electronic processes and of its major component. That component is designed and manufactured by associated company A; is transferred to associated company B which designs and manufactures the rest of the product; and is...
TPG2022 Chapter II Annex II example 1259. Company A, resident in Country A, Company B, resident in Country B, and Company C, resident in Country C, are members of an MNE group. Companies A and B undertake the design and manufacturing of products and their activities in this regard are highly integrated. Additionally, Company A and...
TPG2022 Chapter II paragraph 2.148In addition, If the transactional profit split method is used to set transfer pricing in controlled transactions at the outset, it would be reasonable to expect the life-time of the arrangement and the criteria or profit splitting factors to be agreed in advance of the transaction, The person using the...
TPG2022 Chapter II paragraph 2.142If each party shares the assumption of economically significant risks or separately assumes inter-related, economically significant risks, and a transactional profit split is considered to be the most appropriate method, it is likely that a split of actual profits, rather than anticipated profits, will be warranted since those actual profits,...
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 2.126The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that sector can be...
TPG2022 Chapter II Annex II example 1580. Company A, resident in Country A, and Company B, resident in Country B, are members of an MNE group. Both companies undertake the design and manufacturing of products and their activities in this regard are highly integrated. Additionally, Company A and Company B are responsible for the marketing and...
TPG2022 Chapter II paragraph 2.162Most commonly, the relevant profits to be split under the transactional profit split method are operating profits. Applying the transactional profit split method in this manner ensures that both income and expenses of the MNE are attributed to the relevant associated enterprise on a consistent basis. However, depending on the...
TPG2022 Chapter II Annex II example 1365. Company A, resident in Country A, is the parent company of Retail Group, an MNE group engaged in the retail fashion industry. Over the years, Company A has developed know-how and has enhanced the value of the trademark and associated goodwill of its business through intensive marketing activities. In...