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Profit Split: is it a realistic method without an APA?

Revised OECD guidance on Profit Splits

I just read through the public discussion draft on the revised guidance on transactional profit splits (Please click for the official document as published by the OECD on July 4, 2016). The feeling I had after analysing these 20 pages was that I would (still) not feel very comfortable using a profit split method. In essence, too complex and too many potential areas for discussion, to name a few:

  • Use of actual or anticipated profits?;
  • Is there a sharing of economically significant risks?;
  • Do both parties to the transaction make unique and valuable contributions?;
  • Can (financial) information from foreign group companies be accessed?;
  • Can combined revenues and costs be reliably determined on a common accounting basis?;
  • What would be the appropriate measure of profits?;
  • What would be objective and verifiable profit splitting factor?

Profit Split in practice

Considering all of the above, I really believe that allocating profits based on a profit split would open the can of worms in discussions with tax authorities. At the end of the day, you may be able to withstand their questions, but my best guess now is that this will come with a significant cost (internal management costs and costs of advisors).

Thus, although the revised guidance on Profit Splits is definitely interesting for transfer pricing experts, I am of the opinion that the use of this transfer pricing method will remain limited in practice. In my mind, the application of the profit split as the most appropriate transfer pricing method would only be feasible with a bilateral or multilateral APA. Such an instrument would provide you with upfront certainty on the many items that can hardly be determined without any arbitrariness.

Would you feel confident to apply a profit split method without an APA? Your comments would be welcomed.

Written by: Dick de Boer

 

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