One of the key developments in the OECD Transfer Pricing Guidelines has been the strengthening of the profit split method. Therefore, it is no wonder why, in many national tax rules, the profit split method is considered the most reliable method to assess transfer pricing, especially between integrated group entities.

However, some challenges arise when applying the profit split method. Among these challenges is missing guidance from the OECD on how the ranges of acceptable outcomes produced by the profit split method can be established and how deviations between target profit allocations and actual results should be navigated.

In a recently published International Tax Review article titled “Statistical Approaches to TP Adjustments for Profit Split Systems,” Managing Director Dr. Yves Hervé and Director Philip de Homont discuss the application of transfer pricing ranges in profit split applications and advise taxpayers to seek tested economic and statistical approaches.

The authors also explore ex-post adjustments in transfer pricing, the challenge of ranges in profit splits, and a comparison between ex-post outcomes and ex-ante expectations. They provide a statistical analysis to convey their findings.