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Transfer Pricing Methods

There are a couple of methods that tax authorities and MNEs (Multinational Enterprises) can utilize to figure out precise arm’s length transfer pricing for transactions between associated companies.  

Today, we are going to share with you some of the most common transfer prices methods:  

TNMM (Transactional Net Margin Method) 

One of the transactional profit methods is TNMM. This is utilized to figure out transfer pricing. These forms of methods evaluate the profits from certain controlled transactions. This method includes evaluating the net profit against a suitable base. This includes assets or sales that result from a controlled transaction. According to professionals, the taxpayer has to utilize a similar net profit indicator that they’ll apply in the same uncontrolled transactions to be precise. To find the net margin that will be earned by independent companies in the same transactions, taxpayers can utilize comparable data. Aside from that, the taxpayer has to carry out the transactions’ functional analysis to evaluate their comparability.  

Cost Plus Method 

This approach is an old-school transaction approach that evaluates a controlled transaction between a buyer and an associated supplier. Sometimes, it’s utilized when related bodies have long-term arrangements for supply and buy or when semi-finished products are transacted between associated parties. The expenses of the supplier are added to markup for the service or product so that the supplier makes a suitable profit that considers the current market conditions and the functions they performed. The combined price is the transaction’s arm’s length price.  

Resale Price Method 

The resale price approach is another old-school transaction approach for figuring out transfer pricing. This technique begins by looking at the product’s resale price. The product should be purchased from an associated company and then sold onto an independent body.  The transaction’s price where the item is sold to the independent body is known as the resale price. Then, this approach needs the resale price margin to be recognized. This is the amount of money the company reselling the product will need to cover the expenses of the associated operating and selling costs. Also, the resale price margin includes the amount the reseller will require to make a reasonable profit. They’ve got to consider the functions it achieved. The gross resale price margin is subtracted from the resale price. The arm’s length price for the original transaction between associated bodies is the amount that stays after the margin has been deducted and reasonable alterations have been made.  

CUP Method 

This approach is also an old-school one. It compares the price of services or goods and conditions of a controlled transaction between entities that are related to those of an uncontrolled transaction. To achieve this, the CUP approach needs comparable data from commercial databases. 

Taxpayers can utilize the net profit approach and indications to evaluate the transaction if a change is required for a gross profit markup to be the same, but the details on the relevant expenses aren’t available. This method can be used when the functions achieved by the same companies are a bit different.