Transfer Pricing Methods: A Guide to Profit Split Method

The process of corporate tax registration in the UAE is already underway. However, it is yet to be known how many of the entities are fully aware of the complex corporate tax aspects such as transfer pricing. Transfer pricing kicks in when products or services are exchanged between the divisions of a multinational enterprise (MNE) that are located in various tax jurisdictions.

The prices should be at arm’s length, which means the transactions between associated enterprises must be treated the same way they would between unrelated companies. To prove the transactions are priced at arm’s length, MNEs need to apply transfer pricing methods that are mainly divided into two categories: Traditional Transaction Methods and Transactional Profit methods. Transfer pricing advisers in Dubai can help you choose the most appropriate method.

In this blog, we will be dealing with the Transactional Profit Split Method that comes under the Transactional Profit method. Read ahead to learn more insights:

Transactional Profit Split Method

The transactional profit split method helps MNEs establish arm’s length outcomes or test reported outcomes for controlled transactions in order to approximate the results that would have been achieved between independent enterprises engaging in comparable transactions.

The profit split method first identifies the profits that need to be split from the controlled transactions and then splits them between the associated enterprises on an economically valid basis that approximates the division of profits that would have been agreed at arm’s length.

The transactional profit split method is highly useful when the compensation to the associated enterprises can be more reliably valued by reference to the relative shares of their contributions to the profits arising in relation to the transactions than by a more direct estimation of the value of those contributions.

Strengths of the Transactional Profit Split Method

To determine whether a specific method is the most appropriate transfer pricing method, you need to analyse both its strengths and weaknesses. Transfer pricing consultants in Dubai can be of immense help in analysing the suitability of a method. Given below are the key strengths of the transactional profit split method:

• Offers a solution for cases where both parties to a transaction make unique and valuable contributions (e.g. contribute unique and valuable intangibles)
• Provides a solution for highly integrated operations in cases for which a one-sided method would not be appropriate
• It can offer flexibility by taking into account specific, possibly unique, facts and circumstances of the associated enterprises that may not be present in independent enterprises
• All relevant parties to the transaction are directly evaluated as part of the pricing of the transaction

Weaknesses of the Transactional Profit Split Method

The profit split method has the following limitations:

• Associated enterprises and tax administrations may find it tough to access the detailed information required to apply a transactional profit split method reliably
• Best suited for transactions involving multiple related parties where the contributions of each party to the transaction cannot be readily evaluated using other methods
• To apply this method, MNEs are required to have clear and well-documented intercompany agreements
• Determining the appropriate allocation key for splitting profits between related parties often involves a degree of subjectivity. Selecting the most suitable method for splitting profits can be open to interpretation, and different parties may have different views on what constitutes a fair allocation
• In many cases, finding truly comparable data can be challenging, leading to difficulties in applying the method

Qualified Tax Experts at Tax Gian can Assist you

Navigating transfer pricing in the UAE can be challenging for businesses, especially determining which method is the most appropriate for your company’s transactions. However, leading transfer pricing advisers in Dubai such as Tax Gian can easily resolve your transfer pricing concerns.

We are a flagship brand of Jitendra Tax Consultants (JTC) and it is our mission to support businesses by providing them with an effective Transfer Pricing strategy. Tax Gian can offer bespoke transfer pricing consulting services in Dubai in line with regulatory expectations and aligned with our client’s global business goals. Tax Gian can deliver transfer-pricing models that are consistent with our client’s value chain. Book a consultation with our team of tax experts today to find solutions for all of your direct tax concerns.