Page 81 - Strategic Tax Planning for Global Commerce & Investment

Strategic Tax Planning for Global Commerce and Investment

Residual Analysis Approach

The residual analysis divides the combined profits from the
controlled transactions under review in two stages.

1. First, each participant is allocated arm’s-
length remuneration for its non-unique con-
tributions in relation to the controlled trans-

actions in which it is engaged. Ordinarily,
the remuneration would be determined by
applying one of the traditional transactions
methods or a transactional net margin
method by reference to the remuneration of
comparable transactions between independ-
ent parties. Thus, it would generally not ac-

count for the return that would be generated
by any unique or valuable contribution by
the participants.
2. Second, any residual profit (or loss) remain-
ing after the first stage division would be al-
located among the parties based on an

analysis of the facts and circumstances.

An alternative approach to how to apply the residual analysis
approach could seek to replicate the outcome of bargaining
between independent parties in the free market. In this context,
in the first stage, the initial remuneration provided to each
participant would correspond to the lowest price and
independent seller would be reasonably willing to pay. Any
discrepancy between these two figures could result in the
residual profit over which independent parties would bargain.
In the second stage, the residual analysis therefore could divide

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