The main strength of the transactional profit split method is that it can offer a tax treatment in cases where both parties to a transaction make unique and valuable contributions (eg, contribute unique and valuable intangibles) to the transaction.

On the downside, there are difficulties in applying the principle, OECD admits, stating that ‘it may be difficult to measure the relevant revenue and costs for all the associated enterprises participating in the controlled transactions, which could require stating books and records on a common basis and making adjustments in accounting practices and currencies’.

The BEPS 10 discussion draft addresses situations in which profit splits of anticipated profits or profit splits of actual profits are appropriate, and what factors to take into account in determining whether a profit split of anticipated profits or a profit split of actual profits should be used.

It also considers a number of profit splitting factors including whether the existing references to capital or capital employed as a potential profit splitting factor in the current BEPS 10 guidance should be retained, whether headcount of similarly skilled and competent employees should be included as a potential profit splitting factor, and in what circumstances this would be relevant.

Since there is already substantial guidance available in Chapters I and IX of the Transfer Pricing Guidelines, this OECD draft discussion focuses on narrow scope guidance, including whether adjustments for purchasing power parity should be made for profit splitting factor amounts, what other profit splitting factors should be included and under what circumstances.

It is also keen to gauge views on scenarios in which a transactional profit split is the most appropriate method to use, due to the high level of integration of the business operations, for example.

The revised discussion draft replaces the draft released for public comment in July 2016. Building on the existing guidance in the OECD Transfer Pricing Guidelines, as well as comments received on the July 2016 draft, this revised draft is intended to clarify the application of the transactional profit split method, in particular, by identifying indicators for its use as the most appropriate transfer pricing method, and providing additional guidance on determining the profits to be split.

The revised draft also includes a number of examples illustrating profit splitting principles covering different multinational company scenarios and use of the transactional profit split method.

OECD admits that ‘these Guidelines do not seek to provide an exhaustive catalogue of ways in which the transactional profit split method may be applied. Application of the method will depend on the facts and circumstances of the case and the information available, but the overriding objective should be to approximate as closely as possible the split of profits that would have been realised had the parties been independent enterprises’.  

Closing date

The closing date for comments is 15 September 2017 to [email protected]  in Word format.

The 23-page OECD BEPS Action 10 Revised Guidance on Profit Splits discussion draft is available here