Profit Split Method for Transfer Pricing

Profit Split Method

The Profit Split Method is a Transfer Pricing Method. It allocates the combined profits (or losses) between related entities based on their respective contributions. The PSM method provides a balanced approach for integrated operations, such as joint product development.

The Profit Split Method (PSM) is ideal for transactions involving high interdependence, such as shared development of intellectual property.

Maikel Verhoeven

Managing Director

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How the Profit Split Method works

In the Profit Split Method, rofits are split proportionally, considering:

Functions performed
Assets used
Risks undertaken

The method is often used in highly integrated business operations, where development efforts are shared between multiple entities.

Transfer Pricing Methods - Profit Split Method

The residual profit split method is a variation where routine returns are assigned first, and the remaining profit is split based on value contributions

Webinar: Transfer pricing aspects of financial transactions

Profit Split Method - P&L placement

The Profit Split Method affects the EBIT (Earnings Before Interest and Taxes) level. It evaluates the total profitability of a controlled transaction across entities and splits it accordingly.

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All transactions between related entities should be at arm’s length. This is a very important principle in international tax law. A transfer pricing analysis is required to determine the arm’s length price. The tp analysis will show whether there are opportunities and possible threats within the current transfer pricing policy.

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Profit Split Method