Definition 

The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) by determining the division of profits that independent enterprises would have expected to realise from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the “combined profits”). References to “profits” should be taken as applying equally to losses. See paragraphs 2.130-2.137 for a discussion of how to measure the profits to be split. It then splits those combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm’s length (OECD Transfer Pricing Guidelines 2017, para. 2.114).

Example 

The profit sharing method belongs to the transactional profit methods, along with TNMM. The applicability of the method is considered permissible when transactions are so closely linked that a separate assessment of each individual transaction is not possible. In such cases, independent companies would agree to share profits in the form of a co-partnership.

PSM Example: 

The starting point is two affiliated production companies A and B, which are located in different countries. The production results in the development of intangible assets for joint use. It is assumed that the annual attributable consideration for the assets is equal to the annual expenditure on the assets. Sales are made only to independent companies. In this case, the residual profit split method is the most appropriate method.