RoyaltyStat Blog

Return on Assets - Correct Measure

Posted by Ednaldo Silva on Mar 14, 2016 11:54:36 AM

We must be careful when the profit rate (“return on assets” in the OECD lingo) is selected as the appropriate “profit indicator” to measure the arm’s length behavior of related-party transactions in which the “tested party” (or taxpayer) employs significant identifiable assets (e.g., “capital-intensive activities”) in controlled business. See OECD, Transfer Pricing Guidelines (2010), ¶¶ 2.62, 2.76, 297-298. We have serious misgivings about this choice of profit indicator (called PLI (profit level indicator) in the U.S. Treas. Reg. § 1.482-5(b)(4)(i)(Return on capital employed)) because the usual equation used is misspecified.