In identifying and applying appropriate cost-based profit splitting factors a number of issues may need to be considered. One is that there may be differences between the parties in the timing of expenditure. For example, research and development costs that are relevant to the value of a party’s contributions may have been incurred several years in the past, whereas the expenditure for another party may be current. As a result, it may be necessary to bring historic costs to current values (as discussed further below) in addition to the risk weighting described in paragraph 2.181. The relevant costs may be part of a larger cost pool that needs to be analysed and allocated to the contributions made to the profit split transaction. For example, marketing costs may be incurred and recorded across several product lines, whereas only one product line is the subject of the profit split transaction. Where location savings retained by member(s) of the MNE group are a significant contributor to profits, and such costs are included in the profits to be split, then the manner in which independent parties would allocate retained location savings would need to be reflected in the profit split, taking into account the guidance in section D.6 of Chapter I. Cost-based profit splitting factors can be very sensitive to differences and changes in accounting classification of costs. It is therefore necessary to clearly identify in advance what costs will be taken into account in the determination of the profit splitting factor and to determine the factor consistently among the parties.
TPG2018 Chapter II paragraph 2.182
Category: C. Transactional profit split method, OECD Transfer Pricing Guidelines (2017), Part III: Transactional profit method, TPG2017 Chapter II: Transfer Pricing Methods | Tag: Accounting consistency, Accounting standards, Cost based splitting factors, Most appropriate method (MAM), Profit split examples, Profit split method, Profit splitting factors, Timing of expenditure, Transfer pricing methods
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- TPG2022 Chapter II paragraph 2.183In some cases, a significant issue for the reliability of cost-based splitting factors is the determination of the relevant period of time from which the elements of determination of the profit splitting factor(s) (e.g. assets, costs, or others) should be taken into account....
- TPG2022 Chapter II paragraph 2.170Depending on the facts and circumstances of the case, the factor can be a figure (e.g. a 30%-70% split based on evidence of a similar split achieved between independent parties in comparable transactions), or a variable (e.g. relative value of participant’s marketing contributions...
- TPG2022 Chapter II paragraph 2.171Profit splitting factors based on assets or capital (e.g. operating assets, fixed assets (e.g. production assets, retail assets, IT assets), intangibles), or costs (e.g. relative spending and/or investment in key areas such as research and development, engineering, marketing) may be used where these...
- TPG2022 Chapter II paragraph 2.177Internal data may also be helpful where the profit splitting factor is based on a cost accounting system, e.g. employee costs related to some aspects of the transaction, or time spent by a certain group of employees on certain tasks, etc....
- TPG2022 Chapter II paragraph 2.149There are a number of approaches to the application of the transactional profit split method, depending on the characteristics of the controlled transactions, and the information available. As has been described above, the method seeks to split the relevant profits from controlled transactions...
- TPG2022 Chapter II Annex II example 1580. Company A, resident in Country A, and Company B, resident in Country B, are members of an MNE group. Both companies undertake the design and manufacturing of products and their activities in this regard are highly integrated. Additionally, Company A and Company...
- TPG2022 Chapter II paragraph 2.167One possible approach is to split the relevant profits based on the division of profits that actually is observed in comparable uncontrolled transactions. Examples of possible sources of information on uncontrolled transactions that might usefully assist the determination of criteria to split the...
- TPG2022 Chapter II paragraph 2.172Other profit splitting factors that could be appropriate in the circumstances of a given case include incremental sales, or employee compensation (relating to the individuals involved in the key functions that generate value to the transaction, for example in relation to the global...
- 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...
- 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
- India vs Olympus Medical Systems India Pvt. Ltd., April 2022, Income Tax Appellate Tribunal – New Delhi, Case No 838/DEL/2021Olympus Medical Systems India is a subsidiary of Olympus Corp and engaged in the import, sale and maintenance of medical equipment in India. For FY 2012 and 2013 the company reported losses. An transfer pricing audit was initiated by the tax authorities and...
- 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...
- Greece vs “Raw Materials Ltd”, December 2023, Tax Court, Case No 2129/2023Following an audit of “Raw Materials Ltd” an assessment was issued by the tax authority regarding pricing of intra-group transactions in FY 2018 and 2019. At issue was the pricing of intra group sales and purschases. A complaint was filed by “Raw Materials...
- Poland vs C. spółka z o.o. , June 2022, Administrative Court, Case No I SA/Go 103/22C. spółka z o.o. is part of a larger group and mainly (95%) sells products (metal containers) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to...