Distribution of profit between the parties to the transaction

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Profit distribution method

The profit distribution method can be used in the following cases:

1) if it is impossible to use other methods and if there is a significant relationship between the activities carried out by the parties to the analyzed transaction (group of homogeneous analyzed transactions);

2) if the parties to the analyzed transaction have rights to objects of intangible assets that have a significant impact on the level of profitability (in the absence of homogeneous transactions, the subject of which are objects of intangible assets, concluded with persons who are not interdependent).

Essence of the method

The profit distribution method consists of comparing the actual distribution between the parties to the analyzed transaction of the total profit received by all parties to this transaction with the distribution of profit between the parties to comparable transactions.

In essence, this is a redistribution of profit in the analyzed transaction according to market rules.

When applying the profit distribution method, the following is distributed :

— the total profit of all parties to the transaction;

— (or) residual profit of all parties to the transaction.

Note. If several similar transactions were made between interdependent persons during the tax period, then redistribution is made in relation to the entire set of such transactions, the so-called. group of similar transactions. In other words, such a group of transactions is considered as an analyzed transaction.

Application of the method for distributing the total profit on the analyzed and homogeneous transactions

The profit distribution method is also applied to the total profit on the analyzed transaction and related similar transactions in the case when:

— the parties to the analyzed transaction are simultaneously of their interdependent persons ;

— (and) price assessment for the specified homogeneous transactions for tax purposes is carried out in conjunction with the analyzed transaction.

Note. In this case, total profit should be understood as the total profit received by the parties to the analyzed transaction and similar transactions.

For example, organization 'A' (general taxation regime) leases premises to organization 'B' (general taxation regime). Organizations 'A' and 'B' are interdependent. Organization 'B' subleases the same premises to organization 'B' (STS “income”). In this case, organizations 'B' and 'C' are interdependent entities, but organizations 'A' and 'B' are not. However, in order to control pricing according to “market rules”, the aggregate (total) profit received by the parties to the lease and sublease agreement must be redistributed.

The concept of total profit

The total profit of all parties to the analyzed transaction is the sum of the operating profit of all parties to the analyzed transaction for the analyzed period.

There is no concept of operating profit in Russian accounting standards. There is no definition of this term in Russian tax legislation.

In international practice, operating profit refers to profit from operating (ordinary) activities. The indicator is calculated as the difference between gross profit and operating expenses (commercial and administrative).

Thus, the indicator “operating profit” is an analogue of the indicator “profit from sales”, which is used in domestic accounting.

The concept of residual income

Residual profit (loss) is determined in the following order:

1) for each person who is a party to the analyzed transaction (group of homogeneous analyzed transactions), based on the market price interval for this party, the estimated profit (loss) , which is calculated taking into account:

— the functions performed by this person;

— the assets he uses;

— accepted economic and commercial risks.

Note. The market price range is determined by one of 4 methods:

— method of comparable market prices;

— (or) the subsequent sale price method;

— (or) a costly method;

— (or) the method of comparable profitability;

2) residual profit (loss) on the analyzed transaction is determined as the difference between the total profit (loss) received (received) on the analyzed transaction and the amount of estimated profit (loss) from sales for all parties to the analyzed transaction.

Adjustment of indicators

If organizations total profit is subject to distribution maintain accounting records based on different accounting requirements, then for the purposes of applying the profit distribution method, such accounting (financial) statements must be brought to uniform accounting requirements.

Principles of profit distribution

The choice of profit distribution principles depends on the circumstances of the analyzed transaction (group of homogeneous analyzed transactions).

The chosen principle should lead to a distribution of profit for the analyzed transaction, which would correspond to the distribution of profit between persons carrying out similar activities in comparable commercial and (or) financial conditions.

In this case, the distribution of profit between the parties to the analyzed transaction (group of homogeneous analyzed transactions) is made on the basis of an assessment of the contribution of the parties to the analyzed transaction (group of homogeneous analyzed transactions) to the total profit for the analyzed transaction (group of homogeneous analyzed transactions) in accordance with the following criteria or their combinations:

1) in proportion to the contribution to the total profit of the analyzed transaction of the functions performed by the parties to the analyzed transaction, the assets they use and the economic (commercial) risks they accept;

2) in proportion to the distribution between the parties to the analyzed transaction of the profitability received on the invested capital used in the analyzed transaction;

3) in proportion to the distribution of profits between the parties to a comparable transaction.

The procedure for applying the profit distribution method

When distributing the residual profit (loss) of all parties to such a transaction between the parties to the analyzed transaction, the final amount of profit (loss) of each person who is a party to the analyzed transaction (group of homogeneous analyzed transactions) is determined by summing the corresponding estimated profit (loss) and residual profit (loss) .

To distribute between the parties to the analyzed transaction the total or residual profit (loss) of all parties to such a transaction, the following indicators are taken into account:

1) the amount of costs incurred by a person who is a party to the analyzed transaction for the creation of intangible assets, the use of which affects the amount of actual profit (loss) received on the analyzed transaction;

2) characteristics of the personnel employed by the person who is a party to the analyzed transaction, including their number and qualifications (time spent by personnel, amount of labor costs), which influence the amount of actual profit (loss) from sales under the analyzed transaction;

3) the market value of assets in the use (disposition) of a person who is a party to the analyzed transaction, the use of which affects the amount of actual profit (loss) from sales under the analyzed transaction;

4) other indicators reflecting the relationship between the functions performed, the assets used and the economic (commercial) risks taken and the amount of actual profit (loss) received from sales for the analyzed transaction.

The distribution of profit between the parties to the analyzed transaction (a group of homogeneous analyzed transactions) according to the principle “in proportion to the distribution of profit between the parties to a comparable transaction” is carried out if information is available on the distribution of the amount of profit (loss) from sales on similar transactions made between persons who are not interdependent. This principle may be applied provided that:

1) the accounting data of the parties to the analyzed transaction are comparable with the accounting data of the parties to comparable transactions or are brought to a comparable form by making the necessary adjustments;

2) the total return on assets of the parties to the analyzed transaction does not differ significantly from the total return on assets of the parties to comparable transactions or must be brought to a comparable form by making the necessary adjustments.

The procedure for recognizing (determining) the amount of “market” profit for a party to the analyzed transaction is presented in the table. Based on the data obtained, the taxpayer’s profit is adjusted for corporate income tax purposes.

Table. Determination of “market” profit for tax purposes