A discussion draft issued by the OECD on 22 June 2017 contains revised guidance on profit splits. This guidance is issued in relation to the clarification and strengthening of the guidance on the transactional profit split method as outlined in the final report on actions 8 to 10 of the project on base erosion and profit shifting (BEPS). The draft contains revised text for the guidance on profit splits in Chapter II of the OECD transfer pricing guidelines.
The guidance requests comments on the factors that should be taken into account to determine whether a profit split should be based on anticipated profits or actual profits.
Comments are also invited on whether the references to capital or capital employed as a potential profit splitting factor should be retained and on the issues requiring consideration in choosing and applying these as a suitable profit splitting factor. The guidance as currently drafted points out in section C.5.1. that factors based on assets or capital (operating assets, fixed assets, intangibles or capital employed) or on costs are often used if they capture the relative contributions of the parties.
The guidance as currently drafted also notes that other profit splitting factors that may be appropriate are incremental sales, employee compensation or time spent by a certain group of employees (where there is a strong correlation between time spent and the creation of value reflected in the relevant profits. The discussion draft invites comments on the use of the headcount of similarly skilled and competent employees as a profit splitting factor and on the circumstances in which these would be relevant to a profit split.
The discussion draft raises the issue of adjustments to profit splitting amounts for purchasing power parity and invites comments on the circumstances in which such adjustments would be relevant. The OECD also requests comments on any other profit splitting factors that should be added to the guidance with explanations of the circumstances in which they would apply. Comments are also invited on issues that are not covered by the questions set out in the discussion draft but may be relevant to the revised guidance.
Commentators are invited to submit additional examples of scenarios where the profit split method would be the most appropriate method owing to a high level of integration of business operations. Explanation of the reasons for this should be added.
Comments are invited from interested parties by 15 September 2017. The comments will be taken into account by the relevant OECD Working Party in making appropriate changes to the guidance in Chapter II of the OECD transfer pricing guidelines.