The use of profit splits in commodity trading and banks

There are clear parallels and similarities between the activities undertaken by commodity trading businesses in mining and resources sector, and those undertaken by investment banks operating a financial (and less commonly, physical) trading business.

While for many years banks have pioneered the use of profit split methodologies (PSMs), other sectors including commodity trading businesses, have relied on traditional one-sided methods (e.g., Transactional Net Margin Method or Cost Plus Method) or comparable uncontrolled price (CUP) methodologies to remunerate the trading function.

There is a growing familiarity of the PSM among tax authorities globally, with its use and acceptability no longer limited to traditional sectors like banking. In respect of commodity trading businesses, tax authorities are increasingly looking to explore and challenge those one-sided traditional transfer pricing models, with reference to the revised Organisation for Economic Co-operation and Development (OECD) 2022 TP guidance on the application of PSMs as the focus.

Read more with Deloitte specialists Geoff Gill and Andrew Skipsey highlighting some of the important factual indicators of where a PSM may be the most appropriate method for a global trading business, and explore the implications of different roles of the trading function and capital, and the implications of differences in risk appetite between different business models and sectors over here.