Where the relevant profits to be split are comprised of profits of two or more associated enterprises, the relevant financial data of the parties to the transaction to which a transactional profit split is applied need to be put on a common basis as to accounting practice and currency, and then combined. Because accounting standards can have significant effects on the determination of the profits to be split, accounting standards should, in cases where the taxpayer chooses to use the transactional profit split method, be selected in advance of applying the method and applied consistently over the lifetime of the arrangement. Differences in accounting standards may affect the timing of revenue recognition as well as the treatment of expenses in arriving at profits. Material differences between the accounting standards used by the parties should be identified and aligned.
TPG2018 Chapter II paragraph 2.155
Category: C. Transactional profit split method, OECD Transfer Pricing Guidelines (2017), Part III: Transactional profit methods, TPG2017 Chapter II: Transfer Pricing Methods | Tag: Accounting standards, Applied consistently over the lifetime, Determining profit to be split, Financial data, GAAP (Generally Accepted Accounting Principles), Transfer pricing methods
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- TPG2022 Chapter II paragraph 2.155Where the relevant profits to be split are comprised of profits of two or more associated enterprises, the relevant financial data of the parties to the transaction to which a transactional profit split is applied need to be put on a common basis...
- TPG2022 Chapter II paragraph 2.157However, except in circumstances where the total activities of each of the parties are the subject of the profit split, the financial data will need to be segregated and allocations made in accordance with the accurately delineated transaction(s) so that the profits relating...
- TPG2022 Chapter II paragraph 2.156Financial accounting may provide the starting point for determining the profit to be split in the absence of harmonised tax accounting standards. The use of other financial data (e.g. cost accounting) should be permitted where such accounts exist, are reliable, auditable and sufficiently...
- TPG2022 Chapter II paragraph 2.97One question that arises in cases where the net profit indicator is weighted against sales is how to account for rebates and discounts that may be granted to customers by the taxpayer or the comparables. Depending on the accounting standards, rebates and discounts...
- TPG2022 Chapter II paragraph 2.81Another important aspect of comparability is measurement consistency. The net profit indicators must be measured consistently between the associated enterprise and the independent enterprise. In addition, there may be differences in the treatment across enterprises of operating expenses and non-operating expenses affecting the...
- TPG2022 Chapter II paragraph 2.56The costs that may be considered in applying the cost plus method are limited to those of the supplier of goods or services. This limitation may raise a problem of how to allocate some costs between suppliers and purchasers. There is a possibility...
Related Case Law
- Portugal vs “Tobacco S.A”, May 2021, Supreme Administrative Court, Case No 0507/17“Tobacco S.A.” is the parent company of a group active in the tobacco industry. C. SA is a subsidiary of the group and operates as a toll manufacturer (Toller) on behalf of another subsidiary, B S.A. For the manufacturing services provided C S.A...