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The challenges with the profit split method

18 January 2012

Vijay Iyer of Ernst & Young seeks to discuss some aspects of the profit split method (PSM) in Indian, situations in which PSM can be applied, and the approach and challenges in the application of PSM.

The progress and development of the Indian economy over the past two decades has attracted many multinational enterprises (MNEs) to knock at its shores and explore the resources and the market that it has to offer. Consequently, among other things, this has propelled the Indian tax administration into the limelight, with MNEs expressing their need to become familiar with the significant and relevant aspects of Indian tax law and practice. Ernst & Young's 2010 survey of MNEs on international tax matters demonstrated that more respondents identified transfer pricing as the most important tax issue they face globally as well as in India.

The OECD has clearly defined the profit split method

In general terms, transfer pricing methods look to apply the arm's-length principle as a means to evaluate whether the profits earned by a MNE is what a third party would have earned by transacting with another...

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