Profit split

Profit split is a method to divide the profit of an external sales transaction between the entities involved in the transaction. In LN, this applies to sales transactions in which two entities are involved. For example, the profit gained from a sales order is divided between the sales office and the warehouse.

The profit split method only applies to these intercompany trade scenarios:

  • External Material Delivery Sales
  • External Material Direct Delivery

When the intercompany trade order is created, the profit amount is calculated based on the estimated order price and the estimated cost of goods sold (COGS). During invoicing, the profit is based on the actual order price and COGS.

The profit is divided according to a profit split percentage, which is defined as a default value on the applicable intercompany trade agreement but can be adjusted for the intercompany trade order.

The profit split percentage is defined for the selling entity, the remaining percentage goes to the buying entity.

The profit split percentage is based on the net profit or the gross profit of the sales order. This depends on the Profit Split (Gross) or Profit Split (Net) price origin specified for the intercompany trade order. The default price origin is defined in the applicable intercompany trade agreement.

Gross profit split and net profit split calculation

Gross profit:
Sales order price - COGS
Net profit:
Sales order price - COGS - discounts

The gross profit and the net profit is divided between the entities involved according to the Profit Split Percentage of the intercompany trade order.

Example

The sales office in Paris of a multinational company sells goods to a customer for EUR 1000. The customer is offered a discount of EUR 40. The goods are delivered from the warehouse in London. The warehouse incurs EUR 800 COGS.

The gross profit is 1000 - 800 = EUR 200.

If the price origin is Profit Split (Gross) with a profit split percentage of 60%, the warehouse receives EUR 120 and the sales office EUR 80 (the remaining 40%). The intercompany trade price that the warehouse invoices the sales office is EUR 920:

800 COGS + 120 gross profit. The net profit for the sales office is EUR 40. This is the sales office's gross profit of EUR 80 - EUR 40 discount.

The total net profit is 1000 - 800 - 40 = EUR 160. This is the warehouse's profit of 120 added with the sales office's net profit of 40.

If the price origin is Profit Split (Net) with a profit split percentage of 60%, the warehouse receives EUR 96 and the sales office EUR 64 (the remaining 40%). The intercompany trade price that the warehouse invoices the sales office is EUR 896:

800 COGS + 96 net profit. The net profit for the sales office is EUR 64. The gross profit for the sales office is EUR 104. This is the calculated net profit of EUR 64 + EUR 40 reduction.

Setup

  1. In the Intercompany Trade Agreement (tcitr1600m000), define an intercompany trade agreement with either of these intercompany trade scenarios:

    • External Material Delivery Sales
    • External Material Direct Delivery
  2. Click New on the Transfer Pricing Rules tab and select pricing origin Profit Split (Gross) or Profit Split (Net).
  3. In the Profit Split Percentage field, specify the profit percentage that the selling entity is to receive. In the preceding example, the warehouse is the selling entity.
Related topics