RoyaltyStat Blog

Return on Assets - Correct Measure

Posted by Ednaldo Silva

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.