Do I need a profit split method or will a mark-up do?
Most intercompany dealings are one-sided: one party does routine work and the other keeps what is left, so a mark-up on costs or a margin on sales is enough. A profit split is needed when both sides make contributions that are unique and valuable, because then neither party can be treated as the routine one. The test is what the functional analysis shows about who develops, who decides and who carries risk. If the answer is that both do, a one-sided method will understate one of them, and a split is the honest description of the arrangement.
When is a profit split better than a comparables search?
A comparables search prices one party by reference to independent companies doing similar work. That only works if such companies exist and if the party being tested is the simpler of the two. Where the transaction involves shared intangibles or jointly borne risk, there is usually nothing independent to compare, because independent parties do not enter that arrangement. The profit split takes its evidence from the functional analysis instead, from what each side actually does, owns and controls, and divides the combined profit by reference to relative contributions. It answers a question the comparables search cannot reach.
How do I justify the splitting factors in our analysis?
Splitting factors are the part reviewers press hardest, because a factor is easy to assert and hard to prove. The factor has to be tied to the value drivers the functional analysis identified, and it has to be measurable from records you already keep. Costs, assets and headcount are the usual candidates: development spend where the value comes from building something, intangible cost where it comes from ownership, qualified headcount where it comes from people. What matters is the link between the factor and the driver, shown in writing, not the elegance of the arithmetic.
Can we use a profit split if we have no comparables?
The absence of comparables is a reason to consider a profit split, but it is not by itself a justification. A method is chosen because it fits the transaction, not because the alternatives were inconvenient. So the documentation has to record two things: why the one-sided methods were rejected on the facts, and why both parties' contributions are unique and valuable. If only one side is unique, the other side is the routine party and should be tested directly. Writing down the methods you rejected is part of the file, not an admission against yourself.
Is a profit split harder to document than other methods?
Yes, and unavoidably so. A mark-up method rests on a comparables set that other companies' published accounts supply. A split rests on your own functional analysis, so every element is something you have to evidence: who performs the development, who takes the commercial decisions, who bears the downside, and how the chosen factor maps onto those findings. That means interviews, contracts, cost breakdowns and a written chain from finding to factor. The compensation is that the file is about your own business rather than about a screened set of strangers.
Why was our profit split rejected by the tax authority?
The usual reason is the splitting factor. A split whose factor is stated but never derived, a round percentage with no working behind it, reads as an allocation chosen for the answer it gives. Others fail because the functional analysis does not actually support two unique contributors, so one side should have been tested with a one-sided method. A third group fail on consistency: the accounts, the invoices and the agreements allocate differently from the study. Rebuilding the file usually starts with the functional analysis rather than with the split itself.
What is cross-border tax?
Cross-border tax is what applies when income, assets or people touch more than one tax system at once — someone living in one country and earning in another, a company selling or hiring abroad, a family holding property in a second country. The work is rarely one country's rules applied harder; it is reconciling two sets of rules and claiming the relief that stops the same income being taxed twice at full rates. See what we do.
Is "fund transfer pricing" the same thing as transfer pricing?
No — and if you came here to calculate FTP, this is not it. Fund transfer pricing is a bank's internal allocation of funding costs and benefits between its own business units, a treasury and asset-liability management discipline used to measure branch or product profitability. Tax transfer pricing is about prices between legally separate related parties across borders, and about which country taxes the resulting profit. The words overlap; the fields do not. See our transfer pricing work.
