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Transfer pricing, residual profits and the cost influence curve

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When using the profit split method in transfer pricing the question of how to allocate residual profits can present a significant challenge. In the international engineering and construction (E&C) environment the execution model typically involves a number of different entities being responsible for activities within the supply chain which suggests the use of a profit split method to allocate returns between supply chain participants. However in practice it may be difficult to identify good third party comparables for transfer pricing purposes for the different elements of that activity so it may make sense to use prices achieved in third party contracts with customers and joint venture partners rather than external comparables. The author suggests that in the E&C environment (and possibly beyond) the ‘cost influence curve’ is a useful concept when analysing drivers of project outcomes and it could be used as...

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