The Allocation of Residual Profits Deriving from Intangibles in a Transfer Pricing Context

Abstract: After giving an introduction to the basics of transfer pricing with a focus on intangibles, this paper aims to establish the nature of residual profits and what needs to be considered when such profits are generated. It will become clear that residual profits are an economic concept rather than an element of tax law which is why, first, a connecting link needs to be found between these two disciplines. Once it has been established whether or not residual profits form part of the notion of income as understood in tax law, the analysis will turn to the on-going dispute concerning the application of either the arm’s length principle or formulary apportionment as best method with regards to the allocation of residual profits deriving from intangibles.