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a. Amount A
In contrast to the traditional transfer pricing “separate entity” approach, the calculation…
Accordingly, per the OECD Unified Approach, the first type of profit which is Amount…
As mentioned in the Public Consultation Document, this approach consists of features…
Frist step is would be the identification of the MNE group’s profits. The relevant measure of profits could be derived from the consolidated financial statements under the accounting standards of the headquarters jurisdiction prepared in accordance with the Generally Accepted Accounting Principles or the International Financial Reporting Standards.…
Then, it would be necessary for the calculation of Amount A to seek to approximate the remuneration of the routine activities based on an agreed level of profitability. Generally, these are profits are which would be regarded as rewarding routine functions. They are accordingly excluded from the calculation of the pool of profits from which the allocation to market jurisdictions would be made. The purpose of the simplifying conventions would be merely to simplify the calculation of the deemed non-routine profit subject to the new taxing right…
Once profits in excess of the stipulated level of profitability are deemed to be the group’s non-routine profits, it is then necessary to determine the split of those deemed non- routine profits between the portion that is attributable to the market jurisdiction and the portion that is attributable to other factors such as trade intangibles, capital and risk, etc. This is important as non-routine profit generated by MNE groups is attributable to many activities including those not targeted by the new taxing right. For example, a social media business may generate non-routine profit from its customers’ data and valuable brand, but also from its innovative algorithms and software.…
Given the practical difficulties of using conventional transfer pricing rules for this step, the proposed approach assumes that a share of the deemed non-routine profit attributable to the market jurisdiction…
The final step of the proposed approach would be to allocate the relevant portion of the deemed non-routine profit among the eligible market jurisdictions. This allocation should be based on a previously agreed allocation key, using variables such as sales. The selected variables would seek to approximate the appropriate profit due to the new taxing right.…
4.3.3. Allocation of Profit Under the Unified Approach
b. Amount B
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