An example of the profit split method of the profit split method

Company A and Company B in country B are affiliated enterprises, with the operating assets of Company A being US$50 million and Company B being US$1.5 billion. Company A's cost of sales was US$10 million, and its operating profit was US$2 million; Company B's operating profit for the period was US$3 million. At present, country A should determine the reasonable sales of company A to company B according to the profit split method**, and use the scale of operating assets as the only parameter to measure the size of the contribution to profits.

Since the ratio of the scale of operating assets of companies A and B is 1:3, the ratio of their respective profits should also be 1:3, so that the profits of company A should account for a quarter of the total profits of the two companies of 5 million, that is, US$1.25 million, while the profits of company B should be US$3.75 million.

Since Company A's cost of sales was US$10 million, its reasonable sales** to Company B should be US$1.25 million. Company A is a pharmaceutical company with trademark rights for two drugs, and Company A transfers the trademark use rights and drug processing rights to a subsidiary B in country B, and Company B sells all the drugs to Company A after producing the drugs, and then Company A sells the drugs in country A. The tax department of country A uses the profit split method to allocate profits, and divides the functions played by companies A and B in the process of profit into four types, namely:

Sales, processing and manufacturing, intangible assets in sales and intangible assets in manufacturing.

The tax department determines the profit on the sale and manufacturing functions based on the cost plus a 100% markup; The total profits of companies A and B after deducting the profits from sales and processing and manufacturing are then divided into 55% of the intangible assets owned by company B in terms of manufacturing, and 45% of them are divided into the functions of intangible assets in sales owned by company A.

According to the announcement of the State Administration of Taxation on the issuance of the Administrative Measures for the Adjustment of Special Tax Investigation and Mutual Agreement Procedures (Announcement No. 6 of 2017 of the State Administration of Taxation), "Article 21 The profit division method calculates the amount of profit to be distributed according to the contribution of the enterprise and its related parties to the consolidated profit (actual or estimated) of related party transactions. The profit split method mainly includes the general profit split method and the residual profit split method.

The general profit splitting method usually adopts a profit splitting method in accordance with the arm's length principle to determine the reasonable profits that each party should obtain based on the functions performed, the risks assumed and the assets used by the parties to the related party transaction. When it is difficult to obtain comparable transaction information but the consolidated profit can be reasonably determined, the income, costs, expenses, assets, number of employees and other factors related to the value contribution can be considered in light of the actual situation, and the contribution of the parties to the value of the related party transaction can be analyzed, and the profit can be distributed among the parties.

The residual profit split method takes the balance of the consolidated profits of the parties to the related party transaction minus the regular profits allocated to the parties as the residual profits, and then distributes them according to the degree of contribution of each party to the residual profits.

The profit split method is generally applicable to related-party transactions where both the enterprise and its related parties have a unique contribution to profit creation, the business is highly integrated, and it is difficult to evaluate the transaction results of all parties separately. The application of the profit splitting method should reflect the basic principle that profits should be taxed in the place where the economic activity takes place and where the value is created.

The comparability analysis of the profit split method should specifically examine the functions performed by the parties to the related party transaction, the risks assumed and the assets used, the distribution of income, costs, expenses and assets among the parties, the region-specific factors such as cost savings and market premiums, and other value contribution factors, and the reliability of the information and assumptions used by the parties to determine the residual profit contribution. ”

Profit splitting method: refers to the method of distributing the consolidated profits or losses of an enterprise and its related parties among all parties using reasonable standards. The application of the profit split method should generally include a contribution analysis or a residual value analysis. Carry out.

There are usually two ways to divide the final consolidated profits in the case of affiliated enterprises. The second is the residual profit analysis method, that is, the operating income is first distributed among the affiliated enterprises, and the principle of distribution is to make each affiliated enterprise share the income to make up for its costs and expenses and get the remuneration commensurate with the business activities it engages in, and the remuneration level that the non-affiliated enterprises should obtain when calculating the symmetrical remuneration should be referred to when engaging in similar economic activities; After the first stage of income distribution, the remaining is the residual profit of the affiliated enterprise group, and the distribution of this residual profit is mainly based on the unique assets of each affiliated enterprise, especially the intangible assets therein, because these unique intangible assets should be able to bring a special remuneration to the enterprise.

In terms of the specific distribution ratio of residual profits, the development cost of intangible assets of an enterprise can be an important reference factor.