The Transfer-Pricing Profit-Split Method After BEPS: Back to the Future

Canadian Tax Journal/Revue fiscale canadienne, 2019, Vol. 67, No. 4, p. 1077-1105

U of Melbourne Legal Studies Research Paper No. 898

31 Pages Posted: 31 Jul 2020 Last revised: 3 Aug 2020

See all articles by Michael Kobetsky

Michael Kobetsky

University of Melbourne - Melbourne Law School

Date Written: December 27, 2019

Abstract

In 2018, the Organisation for Economic Co-operation and Development/Group of Twenty (OECD/G20) Inclusive Framework on base erosion and profit shifting (BEPS): action 10 issued revised guidance on the transactional profit-split method. Regrettably, the revised guidance failed to provide the opportunity for the profit-split method to be more often the most appropriate transfer-pricing method. The revised guidance expressly states that the lack of comparable uncontrolled transactions, by itself, is not a basis for the use of the profit-split method. Under the former guidance, the profit-split method was used infrequently. In the revised guidance, the threshold requirements for the use of the profit-split method are still restrictive. Consequently, it is likely that the profit-split method will rarely be the most appropriate transfer-pricing method. Nevertheless, the residual profit-split method is being considered for BEPS action 1, on the taxation of the digital economy. Two of the proposals under pillar 1 of the Inclusive Framework's 2019 short policy note involve the use of the residual profit-split method to allocate profits. These proposals involve new profit allocation rules that go beyond the arm's-length principle.

Keywords: Arm's length, BEPS, OECD, profit-split, transfer pricing

Suggested Citation

Kobetsky, Michael, The Transfer-Pricing Profit-Split Method After BEPS: Back to the Future (December 27, 2019). Canadian Tax Journal/Revue fiscale canadienne, 2019, Vol. 67, No. 4, p. 1077-1105, U of Melbourne Legal Studies Research Paper No. 898, Available at SSRN: https://ssrn.com/abstract=3510267

Michael Kobetsky (Contact Author)

University of Melbourne - Melbourne Law School ( email )

185 Pelham Street
Melbourne, VIC 3010
Australia

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