Guy Sanschagrin and Doug Schwerdt’s article “Introducing the Profit Split Method – To Apply or Not to Apply, This is a BEPS Question” ran in the March 27, 2023, issues of Tax Notes International and Tax Notes Federal. The article examines nuances of the profit split method (PSM), including its origins and when it should be used as a method to help multinational companies (MNCs) allocate profits or losses among controlled entities. By using the PSM to evaluate transfer pricing results and determine and evaluate arm’s-length pricing, MNCs can strengthen their support for their global transfer pricing policies and results around the world.

The OECD Transfer Pricing Guidelines (OECD TPG) and U.S. Treasury Regulations (U.S. Regs) specify transfer pricing methods. The two specified profit-based methods in the U.S. Regs are the PSM and the comparable profits method (CPM). While the CPM has traditionally been commonly used as a more straightforward method that compares operating profit returns of “tested party” entities, it is less suitable than the PSM for transactions among controlled entities that jointly contribute nonroutine intangible property, share significant entrepreneurial risk, or cannot be accurately or reliably separated for financial analysis purposes due to an integrated value chain.

Many practitioners who embrace the BEPS initiative view the PSM favorably as it supports the emphasis of BEPS on aligning transfer pricing outcomes with the economic activities and value-add of controlled parties in MNC value chains. The PSM provides a way to achieve the BEPS goal of allocating profits in accordance with value-creating activities (e.g., manufacturing, marketing, distribution, R&D, the contribution of intangibles, etc.).

If you have any questions about the article or would like more information, please get in touch with the authors:

Guy Sanschagrin, CPA/ABV, Principal in Charge of Transfer Pricing and Valuation Services, WTP Advisors, guy.sanschagrin@wtpadvisors.com

Doug Schwerdt, Transfer Pricing Sr. Manager, WTP Advisors, doug.schwerdt@wtpadvisors.com

Special Thanks:
We thank Kash Mansori, Ph.D. in Economics from Princeton University and Managing Director at WTP Advisors, for his expertise in international trade and transfer pricing.

Keep a lookout for our next article, which will examine the PSM differences and similarities outlined in the OECD TPG and U.S. Regs.