Transactional Profit Split Method

In light of BEPS discussions and digitalization of the economy in recent years, taxpayers and tax authorities are increasingly interested in using the value creation of a group’s entities to estimate the respective profit allocation. In this context, the Transactional Profit Split Method (“TPSM”), one of the transfer pricing methods available in the OECD Transfer Pricing Guidelines, plays an increasingly important role in discussions about arm’s length profit allocations. However, the application of the method is often challenging in practice. This chapter first summarizes the most recent guidance published by the OECD and the EU Joint Transfer Pricing Forum. Reflecting this guidance, we have compiled a practitioner’s checklist for the application of TPSM. Finally, based on the outcome of two Advance Pricing Agreements between the relevant tax authorities of different jurisdictions, this chapter illustrates examples of reasonable considerations with respect to the parameters of a profit split that have been mutually accepted amongst various tax jurisdictions.