Blog

The Profit Split Method: A Transfer Pricing Method for Today

By Chad Martin
May 12, 2025
shipping container ship

In a world where indirect, comparables-based transfer pricing methods like the Comparable Profits Method (CPM) reign supreme, don't forget about the Profit Split Method. 

Let's start with a crash course on the two referenced methods. The CPM evaluates whether the amount charged in a controlled transaction is arm's length based on objective measures of profitability derived from uncontrolled taxpayers that engage in similar business activities under similar circumstances.

The PSM, by contrast, starts with overall profits of a group; PSM allocates the profits derived from a controlled transaction between the transaction participants. It aims for an arm's-length "split" of profits, reflecting the contributions of each party. 

There are a host of reasons that this historically neglected method is becoming increasingly relevant to multinational enterprises (MNEs) in a wide array of industries, transaction categories, and sizes. For example:

  • Increased complexity and ambiguity in the relative functions, assets, and risks undertaken by parties to intercompany transactions in today's MNE contexts.
  • A keener and more explicit interest among jurisdictional and supranational organizational authorities in allocating taxable income in more economically appropriate, often top-down, ways.
  • A trend toward misinterpretation/misapplication of the CPM among tax administrations, who use qualitative and financial arguments to assert higher fixed returns for distributors, service providers, and the like. 

A confession: I'd set out drafting this post with the explicit goal of making it through an entire submission without once mentioning tariffs - and I'm about to fail in that mission. In addition to the above, the PSM can help explain and/or justify erratic or unexpected results due to the allocation of tariff and other unique, jurisdiction-specific expenses.

Taxpayers should consider the PSM as a primary or corroborative method for its ability to paint a holistic picture of a MNE's value chain and profit allocation. 

 

Chad Martin directs Eide Bailly's Transfer Pricing Services practice.

We're Here to Help

We are here to help
From business growth to compliance and digital optimization, Eide Bailly is here to help you thrive and embrace opportunity.
Speak to our specialists

About the Author(s)

Chad Martin

Chad Martin

Principal/Transfer Pricing Services
Chad helps his clients navigate the complexities of today's global transfer pricing rules, regulations and opportunities. He helps companies structure and defend their intercompany transactions with an 'in-house' mindset.

Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. This is meant for educational purposes only. Information presented should not be considered investment advice or a recommendation to take a particular course of action. Always consult with a financial professional regarding your personal situation before making any financial decisions.