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2. Empirical Methods

81. When the book-keeping and other detailed evidence regarding the business in N.E.I. are insufficient, 50 that it is impossible to calculate the local profits on the basis thereof, some other method of allocation must be employed. Efforts are made to collect as much data as possible, so as to obtain a reasonable basis to start from. When the gross receipts, or turnover figures, are known (and, as a rule, they are), a gross profit may be computed by applying to the gross receipts a percentage based on data obtained from similar enterprises. From the gross profit thus estimated, the expenses of the local establishment are deducted in order to arrive at the taxable net profit. As a rule, valuation of the net profit with reference to gross receipts is not to be recommended, as this method is not exact enough, and is apt to neglect differences in costs of doing business in the various countries where the enterprise has branches. The book-keeping of the local branch should show the actual expenditures in N.E.I. The problem of the extent to which the general expenditure of the enterprise is deductible from the profits of the local branch is not be solved along general lines, but depends on the circumstances of the particular kind of business.

82. In certain cases it is assumed that a certain amount may be allowed for the buying office as buying commission, and that it should be equal to the usual buying commission paid to a third person. But this method has the drawback that profit is always attributed to the country where the buying is done, without taking into consideration the total results of the business. Hence, preference is given, on practical and theoretical grounds, to the method of expressing the N.E.I. profits as a fraction of the total profits.

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