Page 80 - Strategic Tax Planning for Global Commerce & Investment

Tax Benefits for U.S. Exporters

 Be consistent with the determina-
tion of the combined profits to be
split and the splitting factors

which would have been agreed
between independent parties
 Be consistent with the type of
profit split approach (i.e. contribu-
tion analysis or residual analysis.

Approaches for Splitting the Profits

There are a number of approaches for estimating the division of
profits, based on either projected or actual profits, as may be
appropriate, to which independent entities would have agreed.
The most commonly used approaches are the contribution
analysis approach and the residual analysis approach.

Contribution Analysis Approach

Under the contribution analysis, the combined profits, which are
the total profits from the controlled transactions under review,
would be divided between the related entities based upon a
reasonable approximation of the division of profits that
independent entities would have expected to realize from
engaging in a comparable transaction. This split could be
supported by comparable data were available. In the absence, it
should be based on the relative value of the functions performed
by each of the related parties participating in the controlled
transactions, taking into account their assets used and risks
assumed. In the situations where the relative value of the
contributions can be measured directly, it would not be
necessary to estimate the actual market value of each
participant’s contributions.

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