EU releases report on application of profit split method

Tax Hot Topics newsletter The European Union’s Joint Transfer Pricing Forum (JTPF) on March 29 issued a report examining the application of the profit split method (PSM) in the EU. The report is the first stage of a two-stage process to clarify and simplify concepts related to the PSM.

Due to increased integration of multinational enterprises and the globalization of national economies, the clarification of a PSM was one of the priorities in the Organisation for Economic Co-operation and Development’s (OECD’s) action plan against Base Erosion and Profit Shifting (BEPS). The aim of the JTPF exercise was to determine how the PSM is applied within the EU and to work toward a common approach to addressing the challenges arising under the current OECD framework. The report is complementary to, and supportive of, the OECD’s revised guidance on the application of the transactional PSM issued in June 2018.

The report focused on the circumstances under which the PSM should be considered the most appropriate transfer pricing method and how profit should be split based on OECD guidelines and factors gathered in JTPF members survey.

It also reiterated the circumstances listed in the OECD guidelines that may indicate that the PSM might be appropriate:

  • A unique and valuable contribution by each party to the controlled transaction
  • A high level of integration regarding the business transactions to which the transactions relate
  • The shared assumption of economically significant risks by the parties to the transaction

The report listed a nonprescriptive inventory of profit splitting factors from a survey of JTPF members. The survey further indicated that the PSM is seldom used at present, and most often in the context of an advance pricing agreement. This may be due to a perceived high degree of subjectivity in the method of profit allocation, and may present greater taxpayer exposure to tax disputes. Due to the potential for future increases in the application of the PSM, it may be useful to monitor the practical application of this method.

David Sites
Partner, Washington National Tax Office
T +1 202 861 4104

Steven Wrappe
Managing Director
Washington National Tax Office
T +1 202 521 1542

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