Category Archives: Action 10

Comments on the Draft Revised Guidance on Profit Splits

14 September 2017

The BMG has made a submission on the Draft Revised Guidance on Profit Splits.

This discussion draft (DD) offers a rewrite of Section C in Part III of Chapter II of the Transfer Pricing Guidelines. Such a rewrite is overdue, as there has not been a comprehensive re-examination of the profit-split method (PSM) since it was included in the Guidelines in 1995.

This DD is written in a much clearer way than the existing section and we welcome the effort that has been made. However, we regret that the opportunity has not been taken to develop and extend the PSM to make it easier to use. In our view this would be the most effective way forward to achieving the central mandate of the BEPS project, to ensure that multinationals are taxed ‘where economic activities occur and value is created’.

In these comments we provide a specific approach that would allow easy use for tax authorities and taxpayers alike. The principal reason for this is that solely objective factors (e.g. personnel, assets, etc.) are used to apportion profits. This approach would ignore internal group-controlled and tax-motivated arrangements such as intercompany contractual terms. It would also dispense with the need for subjective value judgments, greatly reducing the potential for conflict and uncertainty.

Revised Guidance on Profit Splits

The BMG has made a Submission to the OECD Consultation on its draft revisions to the Transfer Pricing Guidelines concern the Profit Split Method.

General Remarks and Summary

We applaud the continued interest of the OECD and Working Party 6 in its work to make the profit-split approach a more viable and important tool in intercompany pricing.

In this submission we propose the development and use of defined allocation keys and weights to apply the profit-split method to actual profits of common business models (see Appendix). In our comments to the specific questions we point out that the examples in the discussion draft assume, without explicitly saying it, that the various business units of a multinational enterprise (MNE) are normally independently managed, albeit with common ownership and some top-level management over policy and direction. In contrast to this assumption, we believe that most MNEs operate as centrally-managed unitary businesses performing core functions and using intangible property in multiple countries. We therefore suggest that it is appropriate to apply the profit-split method to actual profits in these cases. Nevertheless, if Working Party 6 takes a different view, due to their belief that some level of integrated risk sharing is required for application to actual profits, the profit-split method with defined allocation keys and weights could be applied to anticipated gross profits or other measure appropriate for the specific business model. Whether our recommended approach or this alternative is chosen and inserted into the Guidelines, it would greatly simplify things for taxpayers and tax authorities alike.

Presentation at the Regional Meeting in Lima

The BMG was represented by Veronica Grondona at the regional meeting for Latin America and the Caribbean on the BEPS process, organised by CIAT and the OECD, in Lima (Peru) on 28th February.

She made a presentation based on a paper in Spanish which was also circulated to meeting participants. It includes comments both on the BEPS process in general, and some more specific discussion of technical details, based on submissions made by the Group.

The Use of Profit Splits in the Context of Global Value Chains

We have now published our submission in response to the consultation on BEPS Action 10: The Use of Profit Splits in the Context of Global Value Chains


The BMG welcomes this report from the OECD, which confirms that the time has arrived for expanded use of the profit split method, placed on a more regularised and systematic foundation. In our view there is a serious need to develop a simple-to-apply reliable approach to determining how profits will be apportioned amongst the members of a centrally managed multinational group. Specifically, we suggest that the Transfer Pricing Guidelines should include clear guidance stating concrete allocation keys and weightings for all business models now commonly being used. Anticipating the likely emergence of new business models, the Guidelines should also articulate the principles on which concrete allocation keys and weightings should be determined. Such simple and clear rules would be easier to administer, and greatly reduce conflicts both between tax authorities and companies, and among tax authorities. They would make an enormous step towards achieving the aim set by the G20 that multinationals should be taxed ‘where economic activities take place and value is created’.

Transfer Pricing: Risk, Recharacterisation, and Special Measures

We have now published our submission in response to the consultation on BEPS Action Points 8, 9 & 10 Revisions to Chapter I of Transfer Pricing Guidelines (including Risk, Recharacterisation, and Special Measures)


We applaud this discussion draft (DD) as an attempt to reconsider the basic approach, which has too long dominated transfer pricing regulation, that taxation of a multinational corporate group must treat its various component parts as if they were independent entities and focus on the pricing of transactions between them. This independent entity assumption runs totally counter to the current reality existing within these centrally-managed groups, and produces a system which is terribly subjective, often very discretionary, and impossibly difficult to administer.

To examine the details of intra-firm transactions, this independent entity assumption requires tax administrations to use specialist staff, normally in short supply in developed countries and often non-existent in developing countries, with legal expertise in complex structures and transactions, economic analysis capabilities, and specific knowledge of the characteristics of each business sector.

Despite this willingness to reconsider the basic approach, the draft still clings to that mistaken independent entity assumption by continuing to require that inter-affiliate transactions should be the starting point. These transactions are then evaluated in terms of the functions performed, assets owned and risks assumed by the affiliated entities, and the draft attempts to analyse these three factors: Functions-Assets-Risks (F-A-R), especially Risks. The draft rightly recognizes that in an integrated multinational corporate group ‘the consequences of the allocation of assets, function, and risks to separate legal entities is overridden by control’. We cannot agree more with this, since the greater competitiveness and generally higher profits of a corporate group operating in an integrated way derives from the benefits of synergy, so that the whole is greater than the sum of its parts. It is generally difficult or impossible to decide what proportion of the total profits to attribute to particular F-A-Rs within the various group members, especially when central control allows a multinational to transfer at its sole discretion intangible assets, functions, and risks amongst group members solely for purposes of tax minimisation.

Hence, we agree with the analyses in the draft, for example that concerning ‘moral hazard’, which suggests that a contract between associated enterprises in which one party contractually assumes a risk without the ability to manage the behaviour of the party creating its risk exposure is clearly a sham. Following the approach of the DD, this means that non-recognition or other adjustments must be made to appropriately interpret the actual transaction as accurately delineated. Our preferred approach, however, is to begin from the assumption that contracts between associated enterprises cannot be likened to market transactions between independent parties, for that very reason, so that the starting point should be an assumption that contracts between related entities should be disregarded.

Our preference, as we have urged in our separate comments on another report, is that the profit split method should be regularized and systematized, by clarifying the methodology for defining the aggregate tax base to be split, and specifying definite concrete and easily determinable objective allocation keys for all commonly used business models, also including the principles for choosing such keys for new business models as they appear in the future.

Part II proposes some ‘special measures’ which could be applied in defined ‘exceptional circumstances’, which in effect attempt to deal with some of the gaping wounds of the current transfer pricing system. We generally support these as at least an improvement on current formulations: particularly Option 1 (Hard to Value Intangibles); Option 2, first variant (Independent Investor); and Option 4 (Minimum Functional Entity). While we support Option 3 (Thick Capitalisation), in our view it must not form part of the Transfer Pricing Guidelines but belongs in the rules on Controlled Foreign Corporations, which are being separately considered. We detail strong reasons for this view.

We consider that there is merit in the concept of Option 5 (Ensuring appropriate taxation of excess returns), but as presently described it would be counter-productive and only continue to encourage BEPS behaviour, particularly if x% (the defined ‘low-tax rate’) is below the general corporate tax rate in the home country and is both the trigger for application of the CFC rule and the rate of tax to be applied under the CFC rule in the home country of the MNE. We propose that the trigger for applying this Option 5 should be an average effective rate of tax defined as a percentage that is very close to the general corporate tax rate in the home country. In particular, we recommend that it be no less than 95% of that home country rate.

Overall, these amendments to the Transfer Pricing Guidelines, although extensive, would for that very reason make them even more complex, subjective, and, for the most part, impossible for most countries’ tax authorities to administer. These and other drawbacks mean that the overriding need at the present juncture is for rules which are easily administered and that provide results for taxpayers and countries that all regard as fair. In the immediate term, we therefore strongly urge a clear shift towards a systematised and regularised application of the Profit Split method. A next step is a fundamental reappraisal of the Guidelines, and a complete rewriting especially of chapter 1. It should begin by a reversal of the independent entity assumption and an acceptance of the principle that each multinational corporate group must be considered according to the business reality that it operates as an integrated firm under central direction.

Transfer Pricing Aspects of Cross-Border Commodity Transactions

We have now published our submission to the consultation on BEPS  Action Point 10 Transfer Pricing Aspects of Cross-Border Commodity Transactions.


Consideration of the so-called Sixth Method of transfer pricing adjustment for commodities, as used in a number of countries especially in Latin America, is important. However, in our view this report misunderstands the method and the reasons for using it, and its proposals are inappropriate.

The Sixth Method has been adopted by a number of developing countries because it has a number of advantages, but they have also in practice experienced difficulties applying it. Its advantages are that since many commodities are traded on public exchanges, a quoted price can provide a clear and relatively objective point of reference. Hence, it can provide a basis for rules which are easy to administer and do not involve either subjective judgment or detailed examination of facts and circumstances.

However, this does not mean, as the report suggests, that such a quoted price can be used as a ‘comparable uncontrolled price’ (CUP) to adjust the terms of transactions within a multinational corporate group. Independent parties trading commodities settle their agreements in open markets and generally based on future prices, which is quite different from transactions between related parties within large corporate groups. These are generally vertically-integrated, so that the commodity is transferred to the related party for processing and perhaps eventual use in manufacturing; or they are large diversified commodity traders and brokerages. Transfers within such large integrated corporate groups cannot be regarded as in any way equivalent to transactions between unrelated parties, and should not be regarded as the starting point.

The report points to some of the many factors to be taken into account in comparing a quoted price with the actual relationships between a commodity producer and the rest of the MNE group. In our view, these many differences mean that the aim should not be to conduct an exhaustive and detailed comparability analysis of all the contracts involved to arrive at the ‘correct’ price. This would undermine the main advantage of the Sixth Method, which is to provide a clear and objective standard, which is easy to administer.

We suggest that quoted prices should be used as a guide, taking into account the comparability factors mentioned in the report (and others), on the basis of which the tax authority should establish a benchmark price. Such a price should be one that results in an appropriate level of profit for the affiliate based on its activities in the country, and taking into account the value it creates for the MNE as a whole. This includes the benefits of providing a source of supply combined with the management of stocks and of ultimate delivery, and access to raw materials which is a type of location-specific advantage.