Profit methods and the arm's length standard

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Summary: Transfer pricing methodology is based on the concept of eliminating shareholder influences on the terms of transactions between related companies to arrive at correct profits attributable within a group of related companies to avoid profit shifting or double taxation. To achieve this traditionally so-called transaction methods were used. Difficulties in finding comparable data lead to the increasing use of profit methods. However the use of profit methods has proven to be rather controversial. Tax authorities and taxpayers alike have expressed serious concerns about profit methods and in particular about whether they are consistent with the arm's length principle (ALP) as articulated in Art. 9 of the OECD MC. In general, the concerns are that profit methods are more directly influenced by the characteristics of the enterprises and their functions being performed, assets used and the risks incurred are assumed to be present in the transactions considered and thus will be applied in a manner that is too distant from the actual controlled transaction at issue and is still dependent on adequate reference to external data from independent enterprises with an acceptable degree of comparability. Both these aspects, a strong connection to the controlled transactions and a reliance on third party data with adequate comparability, are integral to the ALP

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Summary: Transfer pricing methodology is based on the concept of eliminating shareholder influences on the terms of transactions between related companies to arrive at correct profits attributable within a group of related companies to avoid profit shifting or double taxation. To achieve this traditionally so-called transaction methods were used. Difficulties in finding comparable data lead to the increasing use of profit methods. However the use of profit methods has proven to be rather controversial. Tax authorities and taxpayers alike have expressed serious concerns about profit methods and in particular about whether they are consistent with the arm's length principle (ALP) as articulated in Art. 9 of the OECD MC. In general, the concerns are that profit methods are more directly influenced by the characteristics of the enterprises and their functions being performed, assets used and the risks incurred are assumed to be present in the transactions considered and thus will be applied in a manner that is too distant from the actual controlled transaction at issue and is still dependent on adequate reference to external data from independent enterprises with an acceptable degree of comparability. Both these aspects, a strong connection to the controlled transactions and a reliance on third party data with adequate comparability, are integral to the ALP