The EU joint transfer pricing forum (JTPF), which advises the European Commission on transfer pricing matters, has agreed a report on application of the profit-split method. The report is intended as the first part of a two-stage process, beginning with clarification of certain concepts, while the second stage will explore simplification.
The report aims to examine how the profit-split method is applied within the EU and work towards a common approach to addressing the relevant challenges arising under the current OECD framework.
The profit-split method is one of the five transfer pricing methods described in Chapter II of the OECD transfer pricing guidelines. These methods can be used to establish whether the conditions imposed on the commercial or financial relations between associated enterprises are consistent with the arm’s length principle.
The OECD published a report in June 2018 on the application of profit-split that significantly expanded the guidelines on when it may be the most appropriate transfer pricing method. The guidelines note the main advantage of the profit-split method being in offering solutions in cases where all relevant parties make unique and valuable contributions and/or there is a high degree of integration. In addition, where parties share the assumption of economically significant risks or assume closely related risks, the method’s flexibility allows the determination of an arm’s length profit for the parties according to the actual assumption of the risks.
Difficulties in applying the profit-split method include measuring the relevant revenue and costs between all associated enterprises participating in the controlled transactions and the challenges of identifying appropriate profit-splitting factors.
As a first stage, the EU report aims to complement the OECD guidelines by clarifying:
when to use profit-split as the most appropriate transfer pricing method; and
how to split the profit, based on the revised OECD guidelines, as well as providing an inventory of potential splitting factors.
The report was based on a survey of JTPF members, receiving 17 replies from member states and 11 from non-government members. The survey found no direct correlation between the method and any specific industry. It is applied in several sectors, albeit only to a limited extent, including financial, industrial equipment, automotive, IT, trade in consumer goods, pharmaceutical, chemical and food.
The report concludes that the profit-split method is used infrequently at present, mostly in the context of advance pricing agreement procedures. However, the emergence of new business models may lead to it being applied more often in the future. Specifically, the Commission’s proposal for taxation of ‘significant digital presence’ refers explicitly to using the profit-split method for allocation of profits in the digital economy.
The JTPF now intends to collect further data before moving on to the second stage of exploring simplification. See bit.ly/2WMEEry.
The EU joint transfer pricing forum (JTPF), which advises the European Commission on transfer pricing matters, has agreed a report on application of the profit-split method. The report is intended as the first part of a two-stage process, beginning with clarification of certain concepts, while the second stage will explore simplification.
The report aims to examine how the profit-split method is applied within the EU and work towards a common approach to addressing the relevant challenges arising under the current OECD framework.
The profit-split method is one of the five transfer pricing methods described in Chapter II of the OECD transfer pricing guidelines. These methods can be used to establish whether the conditions imposed on the commercial or financial relations between associated enterprises are consistent with the arm’s length principle.
The OECD published a report in June 2018 on the application of profit-split that significantly expanded the guidelines on when it may be the most appropriate transfer pricing method. The guidelines note the main advantage of the profit-split method being in offering solutions in cases where all relevant parties make unique and valuable contributions and/or there is a high degree of integration. In addition, where parties share the assumption of economically significant risks or assume closely related risks, the method’s flexibility allows the determination of an arm’s length profit for the parties according to the actual assumption of the risks.
Difficulties in applying the profit-split method include measuring the relevant revenue and costs between all associated enterprises participating in the controlled transactions and the challenges of identifying appropriate profit-splitting factors.
As a first stage, the EU report aims to complement the OECD guidelines by clarifying:
when to use profit-split as the most appropriate transfer pricing method; and
how to split the profit, based on the revised OECD guidelines, as well as providing an inventory of potential splitting factors.
The report was based on a survey of JTPF members, receiving 17 replies from member states and 11 from non-government members. The survey found no direct correlation between the method and any specific industry. It is applied in several sectors, albeit only to a limited extent, including financial, industrial equipment, automotive, IT, trade in consumer goods, pharmaceutical, chemical and food.
The report concludes that the profit-split method is used infrequently at present, mostly in the context of advance pricing agreement procedures. However, the emergence of new business models may lead to it being applied more often in the future. Specifically, the Commission’s proposal for taxation of ‘significant digital presence’ refers explicitly to using the profit-split method for allocation of profits in the digital economy.
The JTPF now intends to collect further data before moving on to the second stage of exploring simplification. See bit.ly/2WMEEry.
