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Transfer pricing, residual profits and the cost influence curve

David Murphy (BSI Group) explains why, for transfer pricing purposes, the cost influence curve could be a rational starting point for contribution analysis when allocating residual profits.

The article ‘Sector focus: infrastructure’ (E Walker H Self J Christianand and A Walker) Tax Journal 30 November 2012 included an infrastructure feature to which I contributed a section on transfer pricing in the international engineering and construction (E&C) sector. That gave an overview of one approach to pricing using the profit split method. In simple terms the profit split method in this context is a way of determining the allocation of returns between entities in a project supply chain by subtracting routine returns for project activities from the overall project return and giving the remaining or residual return to one or more participants in the project supply chain. This article looks more...

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