Q: Are there ways through which the subjectivity involved in PSM application can be reduced resulting in a more robust analysis?

Kunj Vaidya (Partner and Leader, Transfer Pricing, PwC India)
There are limitations and complexities involved in application of the PSM, however these could be overcome. A comprehensive and well documented PSM analysis could be defended during audits.

The existing guidance on PSM application includes use of profit splitting factors such ​​as revenue, costs and assets to determine the ratio in which the combined profits would be split. Additionally there are certain tools and techniques that could be applied in a PSM analysis. For instance, Preference Theory helps in identifying relative importance of each value driver and relative contribution of each entity towards the value drivers. Similarly there is another tool called RACI which would convert a qualitative functional analysis into a quantitative matrix by classifying each entity to the transactions among R – responsible, A – accountable, C – consulted, and I – informed.
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