Profit split method. Since very few countries have much experience when it comes to apply the TNMM, and since it is therefore considered to be experimental, most countries prefer to use the PSM as a last resort method. Nonetheless, the PSM has not either been frequently used, and when used it has mostly been in situations where the risk of unrelieved double taxation is minimal (OECD TP guidelines, 1995). The allocation of internal profit, within a corporate group, when using the PSM needs to be performed in an economically well-grounded way (OECD TP guidelines, 1995). There are though two conditions that needs to be fulfilled in order to be able to use the PSM, the first one is that a proper analysis of functions has to be done, and the second one is that it requires information from the involved foreign corporations within the corporate group (SKV M 2007:25) (OECD TP guidelines, 1995). When applying this method, the first thing that must be done is to determine a profit which will be generated by a transaction where two or more associated corporations co-operate. Examples of such transactions can be manufacturing or selling of products. Each MNEs contribution is evaluated on the basis of the function analysis, which is an analysis of the functions performed by each corporation. The second step in setting a TP accordingly to the PSM is to divide the aggregated transaction profits, in a way similar to that if the situation is such that the corporations were not associated to each other (OECD TP guidelines, 1995). To divide the profit there are two different ways to go about, one is the contribution analysis and one is the residual analysis (SKV M 2007:25) (OECD TP guidelines, 1995). However, these two ways are not the only way to apply the PSM, as long as the arm’s length principle is considered, nor are they mutually exclusive. When using the contribution analysis each corporation that is part of the transaction gets their share, which is equal to the comparative value of their function in the line of the transaction, of the total transactions profit. If the residual analysis is used for a specific transaction, then each corporation, which is a part of that specific transaction, gets a part of that transaction’s total profit which is equal to a normal rate of return. Whatever is left after this is divided amongst the concerned corporations in an equal matter as if they would have been independent corporations. One caution that is brought up in the OECD TP guidelines is that th...
