Our article “Introducing the Profit Split Method – To Apply or Not to Apply, This is a BEPS Question” debuted on March 27, 2023, in Tax Notes International and Tax Notes Federal. This article examines the complex facets of the Profit Split Method (PSM), exploring its origins and utility in orchestrating the distribution of profits or losses among controlled entities.

The OECD Transfer Pricing Guidelines and U.S. Treasury Regulations (U.S. Regs) specify various transfer pricing methods. The U.S. Regs present two profit-based methods: the PSM and the comparable profits method (CPM). While the CPM has traditionally been more prevalent due to its simplistic comparison of operating profit returns of “tested parties” with those of comparable uncontrolled companies, it is less equipped than the PSM for transactions among controlled entities that jointly contribute nonroutine intangible property, share significant entrepreneurial risk, or whose activities are intricately linked in an integrated value chain.

Under these three scenarios, the PSM stands out as a versatile and reliable tool. For example, the residual PSM first allocates profits for routine activities, like contract manufacturing or limited-risk distribution. Second, it distributes the remaining nonroutine profits, which often stem from unique and valuable intangible property contributed by two or more controlled entities. This PSM process is consistent with the BEPS objective of aligning transfer pricing outcomes with the economic activities and value contributions of controlled parties in MNE value chains. Thus, BEPS proponents often view the PSM favorably. By strategically employing the PSM to evaluate transfer pricing outcomes, MNEs can reinforce the substantiation of their transfer pricing policies and results.

Please email guy.sanschagrin@wtpadvisors.com if you would like a copy of the article.

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by Guy Sanschagrin and Doug Schwerdt, WTP Advisors