The Profit Split Method is a transfer pricing methodology used to allocate profits or losses between associated enterprises involved in a transaction, based on their relative contributions to the creation of that profit. In crypto, it applies to intercompany dealings involving proprietary trading algorithms, custodial services, or platform development where contributions are difficult to benchmark.
Mechanism
This method involves identifying the total combined profit derived from controlled transactions and subsequently splitting that profit according to the relative value of each party’s contribution, such as intellectual property, capital deployment, or risk assumption. For crypto entities, assessing contributions for decentralized protocols or novel financial products requires specialized valuation models and data analysis.
Methodology
Implementation necessitates a detailed functional analysis of each entity’s roles, assets, and risks within a crypto group’s operations. This methodology ensures that related parties are remunerated appropriately, aligning with arm’s length principles for tax and regulatory compliance, which is particularly important for global crypto businesses with complex operational and jurisdictional structures.
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