Tax authorities may be increasing their use of the profit-split method

The profit-split method “identifies the relevant profits to be split for the associated enterprises from a controlled transaction and then splits those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been agreed at arm's length."

A one-sided transfer-pricing (TP) analysis hypothesizes that if the tested party earns an arm's-length return that is appropriate for its functional characterization, then the other related entity is assumed to earn an arm's-length return, too. The tax authorities can be concerned because there is no visibility of the profitability of the other related entity, and may favour the PSM which is a two-sided analysis that explicitly evaluates whether the profit split between the related entities is appropriate.

Furrthermore, country-by-country reporting (CbCR) requires the multinational corporation (MNC) to disclose relative profitability in each jurisdiction and the required master file (MF) entails the disclosure of the drivers of business profits, such as a description of the supply chain and intellectual property used within the group. It is suggested:

Tax authorities, armed with the additional information available through the CbCR and the MF, are expected to use the PSM as either a primary or a secondary TP method to assess the reasonableness of the TP policies that are applied by an MNC.

Neal Armstrong. Summary of Adrian Tan, “The Emergence of the Profit-Split Method,” Canadian Tax Highlights, Vol. 27, No. 2, February 2019, p. 1 under s. 247(2).