Profit split: uncertainty remains

As part of the BEPS project, the OECD is updating its applicable transfer pricing guidelines. One of the most controversial issues in this update is the use of profit split.

Whereas previously it was a method of last resort, very rarely used, some BEPS stakeholders consider that it should become the standard method of transfer pricing. Advocates of this method point to its appropriateness for the purpose of aligning the national taxable base with the economic substance. Its detractors oppose its implementation complexity and the great uncertainty it brings to companies.

Faced with these conflicting positions, the OECD published a discussion paper, including many questions, and organised a day of discussion on 6 November. Julien Pellefigue was part of the panel of experts interviewed to present Taj’s position on this subject (a recorded version of the debates can be consulted on Taj’s blog:

One of the issues raised by the current version of the discussion paper is its ambiguous position on the arm’s length principle. According to this principle, a profit split between two subsidiaries should only be recommended in economic circumstances in which two independent companies would choose to structure their relations with a profit-sharing contract. Similarly, practical profit-sharing methods should be inspired by the methods actually used by independent companies. However, these principles have not yet been incorporated into the guidelines, and it is still recommended that profit splits be used in situations where independent companies would choose a much simpler pricing method. Similarly, the profit-sharing methods recommended by the OECD, such as allocation using a key based on labour costs, are never used between third parties.

A more empirical approach, based on the analysis of actual business practices, would probably make it easier to reach consensus among the various stakeholders. In the absence of such an analysis, it is to be feared that the final version of the guidelines will be very vague and thus create uncertainty for companies.

Julien Pellefigue

Julien Pellefigue, Partner, is an Economist in the Transfer Pricing department of Taj. He has more than 13 years of consulting experience both in economic consulting (transfer pricing and antitrust) […]