Dusting Off a 30-Year-Old Gem: The Nulon Example’s Timeless Value in Modern Transfer Pricing Controversies

The Residual Profit Split Method (RPSM) provides a framework for equitable profit allocation based on related entities’ contributions, as evidenced by the ‘Nulon example’ in the U.S. Treasury Regulations § 1.482-6(c)(3)(iii). The Nulon example, included in the U.S. Regs since 1994[1], offers valuable insights into the IRS’s RPSM application, though it’s often overlooked.

The Nulon example outlines the RPSM’s two-step process:

1. Assign routine returns based on functions like distribution or customer service.
2. Allocate residual profits (or losses) based on entities’ contributions to intangible development.

The Nulon example highlights key RPSM aspects:

• Recognize contributions to intangible property development, like R&D and marketing expenditures.
• Share the residual profit according to the relative value of each entity’s intangible contributions to achieve fair profit allocation that reflects value creation.
• Address challenges in intangible property valuation by using the capitalized value of expenditures as a proxy for each entity’s relative contribution.

How has the Nulon example influenced global RPSM adoption?

Global Adoption of the RPSM

The Nulon example’s impact extends beyond the U.S., guiding tax professionals worldwide. Conceptually similar to the OECD Guidelines’ “Transactional Profit Split Method using a Residual Analysis,”[2] the RPSM is central to landmark transfer pricing cases across OECD member countries, including Australia, India, Germany, Japan, and the Netherlands. The U.S. Regs RPSM aligns with the OECD Guidelines’ international standard.

Tax courts’ recognition of the RPSM has promoted an internationally harmonized approach. The RPSM’s ability to equitably allocate profits based on each party’s relative contribution to value creation — particularly for intangible assets — has driven its widespread adoption. This flexibility makes the RPSM ideal for complex transfer pricing scenarios where traditional methods may fail to capture the full spectrum of valuable contributions within an integrated value chain.

RPSM Blueprint for Unique Value Chain Contributions

The Nulon example is a blueprint for applying the RPSM to integrated value chains and allocating residual profits relative to unique and valuable contributions. By ensuring compliance and optimizing strategies, MNEs can strengthen their defenses against exams and legal controversies, positioning them for success amid intense scrutiny over intangible profit allocation.

Ready to sharpen your RPSM skills? Click below for an in-depth look at the Nulon example. Discover how the IRS allocated profits between XYZ-U.S. and XYZ-Europe based on their contributions to developing innovative bulletproof products. See how R&D and marketing expenses were critical, leading to a capitalized expense-to-sales ratio and a 1:3 residual profit split. Our article breaks down the factually dense U.S. Regs § 1.482-6(c)(3)(iii)(i)-(viii), explains the “why” behind the IRS’s actions, and clarifies key concepts and calculations. This knowledge will empower you to tackle RPSM-related challenges and confidently address profit allocation issues within your organization.

Download WTP Advisors’ “Guide to Applying the RPSM: The Nulon Example”

Master the RPSM and leverage its strategic advantages for compliance, planning, and dispute resolution.

For more information, please don’t hesitate to contact our specialized profit split advisors:

• Guy Sanschagrin, CPA/ABV, Principal in Charge of Transfer Pricing and Valuation Services at WTP Advisors, guy.sanschagrin@wtpadvisors.com
• Doug Schwerdt, Transfer Pricing Senior Manager, doug.schwerdt@wtpadvisors.com

 

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[1] Department of the Treasury. “T.D. 8552: Intercompany Transfer Pricing Regulations Under Section 482.” Federal Register, vol. 59, no. 130, 8 July 1994, pp. 34971-35033, https://www.govinfo.gov/content/pkg/FR-1994-07-08/html/94-16456.htm.

[2] OECD (2022), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, OECD Publishing, Paris, https://doi.org/10.1787/0e655865-en. See Chapter II, Part III, Section C.3.1.2 for a description of the Residual Analysis approach.