On June 22, 2017 the OECD released a public discussion draft on additional guidance revised guidance on profit splits (BEPS Actions 8-10). The consultation period runs until September 15, 2017.

The discussion draft deals with the clarification and strengthening of the guidance on the transactional profit split method, as set out in the BEPS Actions 8-10, 2015 Final Report.

 

The draft sets out the text of proposed revised guidance on the application of the transactional profit split method, together with a number of questions. The questions are intended to elicit responses which will then be taken into account by Working Party No. 6 in considering revisions to the relevant guidance in Chapter II of the Transfer Pricing Guidelines. The discussion draft concentrates on the guidance proposed to be included in Chapter II, but respondents are reminded that such guidance is provided within a framework of other relevant guidance. In particular the revisions to Chapter I set out guidance on how accurately to delineate the actual transaction between the associated enterprises, including an understanding of the broader context of the value chain to which they contribute, and of a requirement to select the most appropriate transfer pricing method to the circumstances of the case which underpins the discussion of transfer pricing methods in Chapter II. In addition, the revisions to Chapter VI include relevant guidance on identifying and evaluating intangibles. The discussion of the transactional profit split method in this discussion draft should not be taken to imply any change to this wider framework.

 

Although the OECD identified the following specific questions for commentators, the OECD notes that commentators should feel able to comment on points that may not be specifically covered by those questions:

1.   The discussion draft addresses situations in which profit splits of anticipated profits or profit splits of actual profits are appropriate. Where it is established that the transactional profit split is the most appropriate method, please comment on the factors which should be taken into account in determining whether a profit split of anticipated profits or a profit split of actual profits should be used.

2.   A number of profit splitting factors are addressed in the discussion draft. Comments are particularly invited on:

a Whether the existing references to capital or capital employed as a potential profit splitting factor in the current guidance should be retained, and if so, what factors need to be taken into account for its selection and application as a reliable profit splitting factor.

b Should headcount of similarly skilled and competent employees be included as a potential profit splitting factor, and if so, in what circumstances would it be relevant?

c  Given the existing guidance in Chapters I and IX of the Transfer Pricing Guidelines, should adjustments for purchasing power parity be made for profit splitting factor amounts, and if so, in what circumstances?

d What other profit splitting factors should be included in the guidance, and in what circumstances?

3. Additional examples of scenarios in which a transactional profit split is found to be the most appropriate method due to the high level of integration of the business operations are sought, together with an explanation as to the reasoning thereto.

 

The discussion draft discusses a.o. the following subjects:

·   When is a transactional profit split method likely to be the most appropriate method?

o  Strengths and weaknesses of the transactional profit split method

o  Nature of the transaction

§   Unique and valuable contributions by each of the parties to the transactions

§   Highly integrated business operations

§   Shared assumption of economically significant risks, separate assumption of closely related risks

o  Availability of reliable information

o  Conclusions

·   Guidance for application - in general

o  Approaches to splitting profits

§   Contribution analysis

§   Residual analysis

·   Guidance for application - Determining the profits to be split

o  Transactional profit splits of actual or anticipated profits

o  Different measures of profits

·   Splitting the profits

o  Profit splitting factors

o  Reliance on data from the taxpayer’s own operations (internal data)

o  Examples of profit splitting factors

§   Asset-based factors

§   Cost-based profit splitting factors

 

The discussion draft furthermore contains an Annex containing 10 examples to illustrate the guidance on the transactional profit split method.

 

Click here to be forwarded to the Public Discussion Draft: “BEPS ACTION 10 - Revised Guidance on Profit Splits” as released by the OECD on June 22, 2017.

 


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