U.S. Committed to Traditional Position on Profit Splits

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Kevin A. Bell

The U.S. remains committed to the traditional transfer pricing proposition that companies must apply the most appropriate transfer pricing method, a position favored by U.S. multinationals.

OECD Working Party No. 6 is currently trying to reach consensus on new guidance that would help companies decide when to apply the profit split method. The profit split method allocates income between related parties based on their relative contributions—in contrast to one-sided methods, which attempt to peg the value of assets or services based on an analysis of comparable transactions.

“The U.S. has said again that profit splits are great when it is the right thing to do, but you can’t just say that it should be the thing you do all the time,” said Christopher Bello, chief of Branch 6 in the Internal Revenue Service Office of Associate Chief Counsel (International).

The working party may be able to provide more guidance about when a profit split method might be the best method, Bello said June 7 at a transfer pricing conference co-sponsored by Bloomberg BNA and Baker McKenzie LLP in Washington.

Thus, the OECD may be able to reach consensus on more guidance about how profits can be split “in a reliable way and not just a way that looks like formulary apportionment,” Bello said. That is what the working party should try and do with this project, he said.

Bello spoke on a conference panel titled “Are Profit Splits the New Best Method?”

Back Door Formulary Apportionment

The OECD released its second draft guidance on the use of the profit split method for transfer pricing in July 2016. The July draft was seen by many practitioners as walking back from language in OECD guidance on combating tax base erosion and profit shifting issued in October 2015. The 2015 report included a revised Chapter 6 of the OECD transfer pricing guidelines on intangibles, which expanded the use of the method.

Bello said he thinks the working party is much closer to reaching consensus on new guidance than it was in December 2014 when the first draft was released. However, “there have been more drafts since the one you saw in July 2016 so more work needs to be done.”

Panel moderator Salim Rahim of Baker McKenzie in Washington said that although the 2014 and 2016 drafts acknowledge that companies still have to do an appropriate method analysis, “there remains a concern among companies about how tax authorities will treat profit split methods.”

There is “concern tax authorities will simply use profit splits as a back door to formulary apportionment,” Rahim said.

U.S. View

Bello said that in the very early drafts of new revised Chapter 6 there was a “thumb on the sale in favor of profits splits where IP was concerned.”

“It seemed like the thinking at the time was the problem with IP is that companies are putting all of the income in a place where it is not supposed to be, and they are putting none of the income in a place where it is supposed to be,” Bello said.

Companies apparently reasoned that the nature of a profit split is to put some income in both places, and decided to address the IP problem by making people split their profits between the two places, he said. “I guess the idea was that if you have a choice between putting some income in a place where it is supposed to be, as opposed to none, then that is good.”

The U.S. understands the logic of the approach, Bello said, but it isn’t correct. “We just don’t put some income where we would like for it to be. We think that we actually need to use the method that is the best, and that will actually put the right amount of income in the place where it is supposed to be.”

To contact the reporter on this story: Kevin A. Bell in Washington at kbell@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Transfer Pricing Report