For example, two associated enterprises, each with its own manufacturing specialisation and unique and valuable intangibles, agree to contribute the intangibles to produce innovative, complex products. The accurate delineation of the transaction determines that the enterprises in this example share the assumption of risks associated with the success or otherwise of the products in the marketplace. However, they do not share the assumption of risks associated with their selling and other expenses, which are largely unintegrated. Using a profit split based on combined operating profits after all expenses of both parties would have the potential result of sharing the consequences of risks that are assumed by only one of the parties. In such cases, a splitting of gross profits may be more appropriate and reliable since this level of profits captures the outcomes of market and production activities that the parties share together with the assumption of associated risks. Similarly, in the case of associated enterprises that engage in highly integrated worldwide trading operations, if the accurate delineation of the actual transaction determines that the shared assumption of risks and level of integration does not extend to operating costs, it may be appropriate to split the gross profits from each trading activity, and then deduct from the resulting share of the overall gross profits allocated to each enterprise its own operating expenses incurred.
TPG2018 Chapter II paragraph 2.164
Category: C. Transactional profit split method, OECD Transfer Pricing Guidelines (2017), Part III: Transactional profit method, TPG2017 Chapter II: Transfer Pricing Methods | Tag: Different measures of profit, Profit split examples, Profit split method, Shared assumption of risk, Splitting gross profits, Transfer pricing methods, Unique and valuable contributions
« Prev |
Next » Related Guidelines
- TPG2022 Chapter II paragraph 2.165Example 14 in Annex II to Chapter II illustrates the principles of this section....
- TPG2022 Chapter II paragraph 2.164For example, two associated enterprises, each with its own manufacturing specialisation and unique and valuable intangibles, agree to contribute the intangibles to produce innovative, complex products. The accurate delineation of the transaction determines that the enterprises in this example share the assumption of...
- TPG2022 Chapter II paragraph 2.163That is, the measure of profits to be split will depend on the accurate delineation of the transaction. For instance, if the accurate delineation of the transaction determines that the parties share the assumption of not only market risk, which affects the volume...
- 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...
- 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...
- TPG2022 Chapter II Annex II example 1151.  The success of an electronics product is linked to the innovative technological design both of its electronic processes and of its major component. That component is designed and manufactured by associated company A; is transferred to associated company B which designs and manufactures...
- 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...
- 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...
- 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...
- Guidance for Tax Administrations on the Application of Guidance on Hard-to-Value IntangiblesA new report from the OECD contains guidance for tax administration on the application of the approach to hard-to-value intangibles (HTVI), under BEPS Action 8. This new guidance present the principles that should underlie the application of the HTVI approach by tax administration,...
Related Case Law
- 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...
- US vs BAUSCH & LOMB INC, May 1991, United States Court of Appeals, No. 1428, Docket 89-4156.BAUSCH & LOMB Inc (B&L Inc) and its subsidiaries were engaged in the manufacture, marketing and sale of soft contact lenses and related products in the United States and abroad. B&L Ireland was organized on February 1, 1980, under the laws of the...
- 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...
- Poland vs A Sp. z o.o., June 2019, Administrative Court, Case No GD 530/19A Polish Subsidiary A SP. z o.o. had incurred a loss in 2012 in the amount of PLN 1,357,333.66 and following an audit the tax authorities issued an assessment whereby the loss was reduced by an amount of PLN 234,019.90. The disputable issue...