According to the transfer pricing (TP) rules, indicated in OECD TP Guidelines, the commercial and financial transaction between the related parties must comply with the «arm's length principle». This means that the conditions and remuneration set in related parties’ transactions should be valued as if they had been carried out between unrelated parties, each acting in his own best interest.
To ensure that your organization profits fairly from intercompany transactions (transactions with related parties), you can apply a number of transfer pricing methods to determine arm’s length transfer prices for your intercompany transactions.
The transfer pricing methods defined in the OECD Transfer Pricing Guidelines:
The first three of them belong to the traditional methods, while the second two refer to the cost-benefit-based analysis method. More details on each method are provided below.
CUP method is applied to determine whether the price used in a controlled transaction corresponds to market prices, if there is at least one comparable transaction involving identical (when unavailable, homogeneous) goods (work and services) on the relevant market and if sufficient information on such a transaction is available.
Resale Price method is based on a comparison of the gross profit margin received by the person who made the analysed transaction in the subsequent sale (resale) of goods purchased by him in that transaction (group of similar transactions), with the market gross profit margin range.
Cost Plus method is based on a comparison of the gross margin on costs of the party involved in the analyzed transaction (a group of homogeneous transactions) with the market range of gross margin on costs in comparable transactions.
TNMM analyzes profitability at the operating profit level, which is less affected by differences in transaction terms and more resistant to minor functional differences between controlled and market transactions compared to the gross profitability used under the RP and CP methods.
Profit Split method involves comparing the actual allocation of the total profit received by all parties to a transaction with the allocation of profit between the parties to comparable transactions.
To obtain the most reliable results of the market price level, the combination of TP methods can be applied.
It is important to consider that each of the abovementioned methods has its own peculiarities, which depend on their application and local regulatory specifics. However, all these methods share a common goal – to serve as the most appropriate method for a particular case.
ADE Professional Solutions can provide the following support on various transfer pricing issues including:
For over 10 years we have provided advice on transfer pricing to such clients as Volvo, Ritter Sport, Harmtann, Doppelmayr, Hansgrohe, Miele, Sierentz, Deke, Hoya Holding, Farmamondo, Biocodex and many others. More details on www.ade-solutions.ae.
For over 10 years we have been provided advice on transfer pricing to such clients as Volvo, Ritter Sport, Harmtann, Doppelmayr, Hansgrohe, Miele, Sierentz, Deke, Hoya Holding, Farmamondo, Biocodex and many others. For more details, visit www.ade-solutions.ae.
