The Comparable Profit Method prescribed in the Regulations refers to the Arm's-length transaction result of a comparable transaction determined based on the comparable operating profit calculated by using the average profit margin of a comparable Uncontrolled Transaction within a specific time period.

The steps of adopting the Comparable Profit Method are as follows:

1. 

Select the tested parties and tested activities in accordance with Paragraph 3 of this Article.

2. 

Select the comparable Uncontrolled Transactions similar to the selected tested party and tested activities in accordance with subparagraph 1 of Article 7 and Article 8 hereof.

3. 

Select the profit level indicator in accordance with Paragraphs 4 to 6 of this Article.

4. 

Determine the average profit margin of the comparable Uncontrolled Transaction. The average profit margin is equivalent to the sum of the numerator under any subparagraph of Paragraph 4 of this Article within a specific time period divided by the sum of the denominator under the same Paragraph 4 of this Article within the same time period. The aforesaid specific time period is prescribed in Subparagraph 4 of Paragraph 6 of this Article.

5. 

Calculate the comparable operating profit by using the average profit margin prescribed in the preceding Paragraph and the annual average of the operating assets, net sales revenue, operating expenses, or other items of the related business activities of tested parties within a specific time period, and determine the Arm's-length range in accordance with Items 1 and 2, Subparagraph 5 of Article 7 hereof.

6. 

The operating profit is deemed to be at Arm’s-length if the average operating profit earned from engaging in the tested business activity by the tested party within a specific period falls within the Arm's-length range prescribed in the preceding Paragraph. If the operating profit falls outside the Arm's-length range, the operating profit of the tested party in the current year shall be adjusted to the median of the operating profits of all the comparable Uncontrolled Transactions in the current year. In the event that the current year data is not available as described under Subparagraph 4 of Paragraph 6 of this Article, the adjustment shall be made based on the median of the operating profit of all the comparable Uncontrolled Transactions as prescribed in the preceding subparagraph.

7. 

Determine the Arm's-length Result of the participant(s) of the same Controlled Transaction who, other than the tested party, which is/are liable to the ROC income tax pursuant to the ITA, based on the Arm's-length operating profit of the tested party.

The tested party will be the participant of the Controlled Transaction and who could provide the reliable data of the Comparable Uncontrolled Transactions, and the operating profit attributable to the Controlled Transactions can be verified by using the fewest adjustments and get the most reliable results of the adjustment. In other words, the most appropriate tested party will be the least complex of the controlled participants and do not own valuable intangible property or unique assets; or even if it owns such assets but they are similar to the intangible property or unique assets of potential uncontrolled comparables. The so called tested activity will be the most narrow identifiable business activity related to the Controlled Transaction which the tested party joined in.

The profit level indicators used by Comparable Profit Method include:

1. 

Return on operating assets (“ROA”): the ratio calculated by using the net operating profit as the numerator, and the operating assets as the denominator.

2. 

Return on Sales (“ROS”): the ratio calculated by using the net operating profit as the numerator, and the net sales revenue as the denominator.

3. 

Berry Ratio: the ratio calculated by using the gross profit as the numerator, and the operating expenses as the denominator.

4. 

Return on cost and expense: the ratio calculated by using the net operating profit as the numerator, and the cost of goods sold or operating cost and expense as the denominator.

5. 

Other profit level indicators approved by the MOF.

The net operating profit mentioned in the preceding paragraph means the amount of the gross operating profit less the operating expenses, excluding the income unrelated to the tested activities and the extra-ordinary income and loss irrelevant to going-concern activities of the tested party. The operating assets shall be the assets used by the tested party in the relevant business activity, including the fixed assets and current assets but excluding excess cash, short-term and long-term investments, idle assets, and assets irrelevant to the business activities. The operating expenses do not include the non-business related interest expenses, income tax and other expenses irrelevant to the tested activity.

The selection of the profit level indicators prescribed in Paragraph 4 of this Article shall be based on the relevant activity of the tested party, and the following factors shall be considered:

1. 

The nature of the tested party’s activity.

2. 

The degree of comparability of the available information regarding the Uncontrolled Transaction, the quality of the data used and the assumptions made.

3. 

The reliability of the profit level indicator measuring the Arm's-length operating profit of the tested party.

4. 

The time period covered by the information prescribed in Item 2 of this Paragraph should be able to reflect the reasonable profit of the Uncontrolled Transaction. The time period should include at least three consecutive years including the year of the subject transaction and two years preceding such transaction. In case the current year data is not available to the profit-seeking enterprise when filing the current year profit-seeking enterprise income tax return, the profit-seeking enterprise may use at least three of the consecutive prior years’ data of the comparable Uncontrolled Transactions without current year data.

When evaluating the applicability of Comparable Profit Method, the factors prescribed in Paragraph 1 of Article 8 hereof, especially the following factors among the tested parties and tested activities, and the unrelated parties and the related activities conducted by them, shall be considered:

1. 

The factors affecting the comparability, including the functions performed, risks assumed, the operating assets employed, the market level of the relevant trading products or services, the operation scale, the stage of a business or product cycle, etc.

 

2. 

The rationality and compatibility of the allocation of costs and expenses, income and assets between the relevant activities and other activities of the tested parties.

 

3. 

Consistency in accounting practices.

 

If there are any differences of the factors prescribed in the preceding paragraph between the tested parties with the tested activities and the unrelated parties with the business activities conducted by them, appropriate adjustments should be made to eliminate the effect with respect to the operation profit. In the event that the effect of aforementioned differences cannot be eliminated by appropriate adjustments, other Arm's-length Methods as set forth hereunder shall be employed.