TPG2018 Chapter II paragraph 2.159

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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Where the transactional profit split method is found to be the most appropriate, the splitting of actual profits, i.e. profits which have been affected by the playing out of economically significant risks, would only be appropriate where the accurate delineation of the transaction shows that the parties either share the assumption of the same economically significant risks associated with the business opportunity or separately assume closely related, economically significant risks associated with the business opportunity and consequently should share in the resulting profits or losses. These kinds of risk assumption may occur in scenarios where the business operations are highly integrated and/or each party makes unique and valuable contributions.






Related Guidelines

  1. TPG2022 Chapter II paragraph 2.160Alternatively, if the transactional profit split is found to be the most appropriate method (e.g. because each party to the transaction makes unique and valuable contributions) but one of the parties does not share in the assumption of the economically significant risks which...
  2. TPG2022 Chapter II paragraph 2.137Where a party contributes to the control of economically significant risk, but that risk is assumed by the other party to the transaction, this may, in some cases, demonstrate that it is appropriate for the first party to share in the potential upside...
  3. 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,...
  4. TPG2022 Chapter II paragraph 2.165Example 14 in Annex II to Chapter II illustrates the principles of this section....
  5. TPG2022 Chapter II paragraph 2.128A lack of closely comparable, uncontrolled transactions which would otherwise be used to benchmark an arm’s length return for the party performing the less complex functions should not per se lead to a conclusion that the transactional profit split is the most appropriate...
  6. TPG2022 Chapter II paragraph 2.143In general, it will tend to be the case that the presence of factors indicating that a transactional profit split is the most appropriate method will correspond to an absence of factors indicating that an alternative transfer pricing method – one which relies...
  7. 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...
  8. 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...
  1. EU Report on Improving the Functioning of the Arbitration Convention (2015)In April 2015 the Forum agreed on a Report on Improving the Functioning of the Arbitration Convention including a revised Code of Conduct for the effective implementation of the Arbitration Convention. The report and the revised Code of Conduct are the result of...
  2. THE APPLICATION OF THE PROFIT SPLIT METHOD WITHIN THE EU (2019)This paper addresses the first stage and aims at clarifying certain concepts in applying the PSM: (i) when to use the PSM (i.e. in which circumstances it may be considered the most appropriate transfer pricing method) and (ii) how to split the profit...

Related Case Law

  1. 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...
  2. Japan vs. “Metal Plating Corp”, February 2020, Tokyo District Court, Case No 535 of Heisei 27 (2008)“Metal Plating Corp” is engaged in manufacturing and selling plating chemicals and had entered into a series of controlled transactions with foreign group companies granting licenses to use intangibles (know-how related to technology and sales) – and provided technical support services by sending...
  3. Spain vs Ferroli Espa̱a, S.L.U., May 2023, Audiencia Nacional, Case No 3400/2023 РECLI:EN:AN:2023:3400Ferroli Espa̱a, S.L.U. is a Spanish manufacturer manufacture of cookers and heaters. In FY 2010 and 2011 the company had various transactions with other companies in the Ferroli Group and reported negative profit margins on these transactions. According to the company this was...
  4. Tokyo District Court, judgment of November 24 2017In this case a Japanese company had entered into a series of controlled transactions with foreing group companies granting services and licences to use intangibles – know-how related to manufacturing and sales, training, and provided support by sending over technical experts. The company...