OECD profit split guidance leaves door open for interpretation

The OECD released guidance on the application of the transactional profit split method, as laid down in BEPS Action 10, on June 21. The guidance has been incorporated into the OECD Transfer Pricing Guidelines and replaces the previous guidance on the method in Chapter II.

The document expands on when the profit split method may be the most appropriate method. Nonetheless, advisers are still concerned that some definitions are not tight enough, leaving room for interpretation and potential controversy.

The guidance includes 16 examples of how to apply the method. It expands on the appropriate profit splitting factors and the relevant profits to be split.

The guidance states that the profit split method should still be applied where it is the most appropriate method to hand, but makes it clear that a lack of comparables does not warrant the use of the method.

Maikel Verhoeven, one of our transfer pricing managers, told TP Week: “Although multiple practical difficulties are mentioned throughout the report, little guidance is given on how to cope with, for example, accounting differences and whether some pragmatic solutions may be applied, such as management accounts based on the same principle, instead of local accounts. This was also the case for the examples, which had ‘conceptually little differences’”.

According to Maikel, examples related to the digital economy, and whether there is consensus that the profit split method cannot be applied in such situations, would have been useful.

 

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