OECD: Profit splits, global value chains (BEPS Action 10)

OECD: Profit splits (BEPS Action 10)

The Organisation for Economic Co-operation and Development (OECD) earlier this week released a discussion draft—BEPS Action 10: Discussion Draft on the Use of Profit Splits in the Context of Global Value Chains)—under the OECD’s base erosion and profit shifting (BEPS) project.

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Read the BEPS Action 10 discussion draft [PDF 402 KB]


The OECD identified three actions related to determining that transfer pricing outcomes are in line with value creation in its BEPS action plan.One of these three actions is Action 10 (other high-risk transactions) that calls for developing rules to prevent base erosion and profit shifting that arises when taxpayers engage in transactions that would not, or would only very rarely, occur between third parties.

One of the mandates of BEPS Action 10 is to clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains.

The OECD on 16 September 2014, issued a report that concerns the tax challenges of the digital economy, and that report identifies issues in the digital economy that need to be taken into account with respect to the transfer pricing work on BEPS—including the need for increased reliance on value chain analyses and profit split methods. The OECD on 16 December 2014 also released a discussion draft in accordance with this mandate.

Overview of the BEPS Action 10 discussion draft

The BEPS Action 10 discussion draft considers several key issues related to the application of transactional profit split methods, provides illustrative scenarios for each of the issues, and poses some questions for public discussion related to the issues and scenarios.

The BEPS Action 10 discussion draft notes that the included scenarios are meant for discussion purposes only and are not intended to imply that transactional profit split methods will be the most appropriate method in the circumstances outlined in those scenarios.

The key issues considered in the BEPS Action 10 discussion draft are as follows:

  • Global value chains - A global value chain is described as the “full range of firms’ activities, from the conception of a product to its end use and beyond.” The discussion draft notes that one-sided methods may not be able to reliably account for the interdependence of key functions and risks in global value chains, and transactional profit split methods may be appropriate.
  • Appropriate scope for the application of transactional profit split methods - The discussion draft discusses circumstances when profit split methods are likely to be the most appropriate for determining arm’s length pricing:
    • When both parties to a transaction make unique and valuable contributions—i.e., contributions that constitute a key source of competitive advantage for the business, and create difficulties in terms of finding reliable comparables
    • When a multinational entity’s business operations are highly integrated such that strategic risks are jointly managed and controlled by more than one party
    • When there is fragmentation of functions within a value chain such that it is difficult to find comparable uncontrolled enterprises specialized in the narrow activity carried out by the controlled enterprise
    • In general, when there is a potential lack of reliable comparables for a one-sided method
  • Aligning taxation with value creation - The BEPS Action 10 discussion draft illustrates considerations for developing profit allocation keys such that transfer pricing outcomes are aligned with value creation.
  • Dealing with ex ante / ex post results – According to the BEPS Action 10 discussion draft, transactional profit split methods may provide an approach to deal with unanticipated events that could lead to significant differences between ex ante and ex post results.
  • Dealing with losses - The BEPS Action 10 discussion draft considers whether profit split methods may be applied in a different way when there are losses to split instead of profits.

The BEPS Action 10 discussion draft illustrates each of the issues listed above using examples or scenarios, followed by questions intended to elicit responses from the public. In addition, the discussion draft invites comments on the relevance of transactional profit split approaches to hard-to-value intangibles.

The discussion draft includes the current text of the OECD Transfer Pricing Guidelines related to the application of transactional profit splits, along with the text of Examples 17 and 18 from the intangibles guidance in an annex for reference.

Next steps

The OECD invites public comments on the discussion draft, which are to be submitted by 6 February 2015. A public consultation on the discussion draft and other matters will be held in Paris on 19-20 March 2015.

KPMG observation

The OECD has taken a consultative approach on the issue of profit splits, laying out issues for consideration and inviting comments from the public by posing both targeted questions related to the issues and also open-ended ones. It does not provide recommendations, but rather directs the discussion to issues the OECD believes are important. This early consultation with stakeholders is viewed as a useful approach in this difficult area.

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