Description of the method : the profit distribution method (MPZ) is the first of the transaction profit methods indicated in Polish tax regulations, which consists in determining the total profits that related entities in connection with a given transaction (transactions) were obtained, and the distribution of these profits among these entities in such the proportion in which independent entities would make this division.
Total profits are determined using the common accounting standard and the common currency, if the related entities for which the profit is determined apply the common accounting standard and keep their books of accounts in the common currency. Otherwise, total profits are determined by applying one of the accounting standards and one of the currencies used by related entities.
The distribution of profits resulting from the above-mentioned proportion can be made in two ways:
- residual analysis
Name: Profit sharing method (MPZ) – residual analysis
Type of method: tax method from the group of transaction profit methods
Description of the method: the residual analysis should be understood as a method that divides the sum of profits obtained in connection with a given transaction (s) by related entities participating in this transaction (s) in two stages.
In the first stage, each transaction participant is assigned the minimum profit achieved by independent entities in this type of transaction; in the second stage, all profits remaining after the distribution in the first stage are divided among related entities participating in a given transaction in accordance with the rules that would be established by independent entities participating in such a transaction; if the sum of profits achieved by related entities is lower than the sum of the profits assigned in the first stage, the profits assigned are reduced; the adjustment made in the second stage takes into account economic functions, such as:
- division of economic risk and liability of the parties to the transaction,
- size of involved resources, machines and devices,
- the value of the intangible goods involved.
The residual analysis breaks down the profits of transactions based on objective measures, which may be profitability indicators, in particular profitability on sales or operating activities. It should be noted that profitability ratios reflect the ratio of a specific profit (on gross sales, net sales, operating activity, business, gross or net) to certain measures of revenues, which illustrates the direct profitability of transactions made by the entity within the individual types of the entity’s activities.
This indicator allows for the assessment of the profitability of the entity’s operations, showing how much profit on revenues is generated by one zloty of this revenue, so it can be concluded that they constitute a criterion for the distribution of transaction profit that unrelated entities would expect. If, on the other hand, the enterprise sells its products or services only to related entities, this is the case with consulting companies for the capital group, then the above-mentioned measures can be applied in relation to the same measures obtained by unrelated entities conducting similar business activities after appropriate correcting them with the following elements:
- the amount of turnover,
- turnover structure,
- period of operation on a given market,
- the nature of the services provided or products sold,
- others, which significantly testify to the different nature of the compared companies (here, benchmarking is a good tool for examining the comparability of measures).
Comparability of transactions: required by the provisions of Chapter 2 Study of the comparability of transactions in connection with Chapter 3 Methods of price verification of the Regulation of the Minister of Finance of December 21, 2018 on transfer pricing in the field of corporate income tax.
- participation analysis
Name: Profit Distribution Method (MPZ)
Type of method: tax method from the group of transaction profit methods
Description of the method: Participation analysis is one of two proportional profit sharing methods that divides the combined profit of a related party transaction for goods produced or improved by those related parties, based on the relative value of the actions taken by each related party, taking into account the following factors:
- division of economic risk and liability of the parties to the transaction,
- the size of the resources, machinery and equipment involved,
- the value of the intangible goods involved.
As can be seen from the above, the analysis of the share is essentially based on subjective factors, which consist in justifying the relative value of the activities undertaken in order to achieve transactional income. The relativity of activities can be tested based on the measures described in the residual analysis, however, the main elements here are the functional analysis of the parties to the transaction, the assets used and the risks incurred, and the costs associated with the transaction.
Comparability of transactions: required by the provisions of Chapter 2 Study of the comparability of transactions in connection with Chapter 3 Methods of price verification of the Regulation of the Minister of Finance of December 21, 2018 on transfer pricing in the field of corporate income tax.
Mathematical formula: There is no single formula for using a given method.
The proportional distribution of profits is made by appropriate determination of the revenues obtained by each of the related entities and the costs incurred related to a given transaction (transactions). The lack of legal regulations on the methods of determining profits and costs related to the transaction causes the selection of any actions, as a result of which the profit will be determined in accordance with the principles of tax law.
In order to properly define the transaction profits realized by related entities, the structure of the transaction should be considered first. It is difficult to use only a one-way transaction, such as the supply of raw materials or the sale of finished products, without taking into account the profits from the sale of finished products, in which these raw materials constitute a production factor. Practice shows that only when the subject of the transaction are intangible goods or services, the transaction may be considered unilaterally. In such a case, the profits on the part of the supplier or service provider are specified directly, while for the buyer the relative value of the benefits obtained by this entity as a result of purchasing these rights or services is indicated (calculated).
Comparability of transactions: required by the provisions of Chapter 2 Study of the comparability of transactions in connection with Chapter 3 Methods of price verification of the Regulation of the Minister of Finance of December 21, 2018 on transfer pricing in the field of corporate income tax.
Mathematical formula: was indicated in the description of the profit distribution method made with the residual and share analysis .