The EUJTPF recently issued a report in which it hoped to clarify key concepts under which the profit split method may be used and on what basis to split the relevant profits. The EU Joint Transfer Pricing Forum, is an entity that assists and advises the European Commission on transfer pricing tax matters.
Source: EUJTPF Report (modified extracts below)
The OECD guidelines of 1995 referred to the PSM as a method of “last resort”, to be used when other methods could not be reliably applied (para. 3.50). Yet, since the revision of the OECD Guidelines in 2010, the PSM is considered a pricing method to be applied in an equally reliable manner as the other methods in accordance with the “most appropriate method” criterion.
The main advantage of the PSM is that it can offer solutions in cases where all relevant parties make unique and valuable contributions and/or there is a high degree of integration. However, there are distinct difficulties in the application of the PSM, including problems of measuring the relevant revenue and costs between all associated enterprises participating in the controlled transactions and the challenges of identifying appropriate profit splitting factors.
The EUJTPF agreed on a 2-stage process whereby at the first stage, the focus should be on clarifying certain concepts related to the PSM and eventually at the second later stage on exploring ways for simplification.
This first paper addresses the first stage and aims at clarifying certain concepts in applying the PSM: (i) when to use the PSM and (ii) how to split the profit.
The report is stated to be regarded as complementary to, and supportive of, the text of the OECD Revised Guidelines on the application of the Transactional Profit Split Method issued in June 2018.