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Tax Journal Article on Implementing Transactional Profit Split Arrangements

Intercompany Agreements

4 November 2022

Allocation of risk in transactional profit split arrangements: a Catch-22?

I thought that you might like to read an article that has just been published in the Tax Journal, co-authored by me and the Frankfurt-based TP economist Philip de Homont.

The title is 'Transfer pricing: a framework for implementing transactional profit split arrangements'. In the article we look at, among other things, the relationship between economic analysis and contractual allocation of risk in such arrangements. There is an interesting aspect to this which at first glance presents a Catch-22.

The OECD TP Guidelines set out three conditions under which profit splits are particularly appropriate, one of which is that the parties ‘share the assumption of economically significant risks.’ These risks can be contractually specified: taxpayers can strengthen their transfer pricing method selection by being specific in their intercompany contracts about the allocation of risk.

But how can you use the shared assumption of risk as a condition for selecting the profit split method when the allocation of risks (and rewards) between parties is a consequence of doing so? The answer is that this apparent gap can be bridged by thorough economic analysis and appropriate implementation in intercompany contracts. Risks need to be accurately identified, appropriately allocated by the relevant terms of an intercompany agreement, and priced accordingly based on the economic analysis.

You can read the full article here.

As always, if you’d like to share any comments or experiences, I will be very pleased to hear from you.

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Article by
Paul Sutton
LCN Legal Co-Founder

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