TPG2018 Chapter II paragraph 2.119

Category: C. Transactional profit split method, OECD Transfer Pricing Guidelines (2017), Part III: Transactional profit method, TPG2017 Chapter II: Transfer Pricing Methods | Tag: , , , , ,
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The 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 proportion to their respective contributions, making a two-sided method more appropriate. Furthermore, since those contributions are unique and valuable there will be no reliable comparables information which could be used to price the entirety of the transaction in a more reliable way, through the application of another method. In such cases, the allocation of profits under the transactional profit split method may be based on the contributions made by the associated enterprises, by reference to the relative values of their respective functions, assets and risks. See section C.2.2 below on the nature of the transaction.






Related Guidelines

  1. 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....
  2. TPG2022 Chapter II paragraph 2.122A further strength of the transactional profit split method is that all relevant parties to the transaction are directly evaluated as part of the pricing of the transaction, that is, the contributions of each party to the transaction are specifically identified and their...
  3. TPG2022 Chapter II paragraph 2.127At the other end of the spectrum, where the accurate delineation of the transaction determines that one party to the transaction performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution...
  4. TPG2022 Chapter II paragraph 2.5However, it is not appropriate to apply a transactional profit method merely because data concerning uncontrolled transactions are difficult to obtain or incomplete in one or more respects. The same criteria listed in paragraph 2.2 that were used to reach the initial conclusion...
  5. TPG2022 Chapter II paragraph 2.161In any application of a transactional profit split, care should be exercised to ensure that the method is applied without hindsight. See paragraph 3.74. That is, irrespective of whether a transactional profit split of anticipated or actual profits is used, unless there are...
  6. TPG2022 Chapter VI paragraph 6.210Section C in Part III of Chapter II contains guidance to be considered in applying transactional profit split methods. That guidance is fully applicable to matters involving the use of intangibles in connection with the sale of goods or the provision of services...
  7. TPG2022 Chapter II paragraph 2.179Asset-based or capital-based profit splitting factors can be used where there is a strong correlation between tangible assets or intangibles, or capital employed and creation of value in the context of the controlled transaction. In order for a profit splitting factor to be...
  8. TPG2022 Chapter II paragraph 2.66There are also many cases where a party to a transaction makes contributions that are not unique – e.g. uses non-unique intangibles such as non-unique business processes or non-unique market knowledge. In such cases, it may be possible to meet the comparability requirements...
  1. EU JTPF, March 2017, Report on the Use of Comparables in the EUIn March 2017 the JTPF agreed the Report on the Use of Comparables in the EU. The report establishes best practices and pragmatic solutions by issuing various recommendations for both taxpayers and tax administrations in the EU and aims at increasing in practice...
  2. 2018: ATO Taxpayer Alert on Mischaracterisation of activities or payments in connection with intangible assets (TA 2018/2)The ATO is currently reviewing international arrangements that mischaracterise intangible assets[1] and/or activities or conditions connected with intangible assets. The concerns include whether intangible assets have been appropriately recognised for Australian tax purposes and whether Australian royalty withholding tax obligations have been met. Arrangements...

Related Case Law

  1. India vs Toyota Kirloskar Auto Parts Private Limited, March 2020, Income Tax Appellate Tribunal – BANGALORE, Case No IT(TP) No.1915/Bang/2017 & 3377/Bang/2018Toyota Kirloskar Auto Parts Private Limited manufactures auto parts and sold them to Toyota Kirloskar Motors Limited, another Indian corporation in the Toyota Group. In FY 2013-14 Toyota Kirloskar Auto Parts Private Limited paid a 5% royalty to the Japanese parent Toyota Motor Corporation...
  2. Japan vs “Banana Corp”, April 2009, Tokyo District CourtThe “Banana Group” is based in Ecuador and is engaged in the business of exporting Ecuadorian bananas. The Japanese distributor was part of the Banana Group. An Ecuadorian group company purchases bananas produced on plantations in Ecuador, exports and sells them to another...
  3. Luxembourg vs L SARL, January 2020, Luxembourg Administrative Tribunal, Case No 41800In 2013, L SARL requested in writing an “advance tax agreement” regarding the tax treatment of Mandatory Redeemable Preference Shares (MRPS) which generated a preferred dividend for its sole shareholder. L SARL wanted confirmation that the MRPS would be characterised as debt and...
  4. Portugal vs “A-Contract Manufacturer LDA”, December 2020, CAAD Tax Arbitration, Case No 808/2019-TA-Contract Manufacturer LDA is an entity residing in Portugal, whose main activity is contract manufacturing of coffee machines and irons, as well as spare parts, tools etc. on behalf of its German parent B A.G. Following an audit, the tax authorities found that...