The Transfer Pricing MethodsBy Robert Robillard - 17 June 2014
Paragraph 2.1 of the OECD Transfer Pricing Guidelines indicates that “traditional transaction methods” and “transactional profit methods” can be used to establish whether the conditions imposed in the commercial or financial relations between associated enterprises are consistent with the arm’s length principle.”
In Canada, paragraph 48 of IC 87-2R International Transfer Pricing states:
“The OECD Guidelines recommend a number of transfer pricing methods (known as “the recommended methods”) that, when applied correctly, result in an arm’s length price or allocation. These methods are divided into two groups:
· traditional transaction methods:
- the comparable uncontrolled price (CUP) method;
- the resale price method; and
- the cost plus method;
· transactional profit methods:
- the profit split method; and
- the transactional net margin method (TNMM).”
Paragraph 2.1 of the OECD Transfer Pricing Guidelines explains:
“The selection of a transfer pricing method always aims at finding the most appropriate method for a particular case. For this purpose, the selection process should take account of the respective strengths and weaknesses of the OECD recognised methods; the appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through a functional analysis; the availability of reliable information (in particular on uncontrolled comparables) needed to apply the selected method and/or other methods; and the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them. No one method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances.”
In the United States, Item (b)(2) of section 482, §1.482-1 Allocation of income and deductions among taxpayers, suggests:
“Arm’s length methods—(i) Methods. Sections 1.482-2 through 1.482-7 and 1.482-9 provide specific methods to be used to evaluate whether transactions between or among members of the controlled group satisfy the arm’s length standard, and if they do not, to determine the arm’s length result. This section provides general principles applicable in determining arm’s length results of such controlled transactions, but do not provide methods, for which reference must be made to those other sections in accordance with paragraphs (b)(2)(ii) and (iii) of this section. Section 1.482-7 provides the specific methods to be used to evaluate whether a cost sharing arrangement as defined in §1.482-7 produces results consistent with an arm’s length result.”
For instance, in the case of transfer of tangible property, §1.482-3 Methods to determine taxable income in connection with a transfer of tangible property states:
“(a) In general. The arm’s length amount charged in a controlled transfer of tangible property must be determined under one of the six methods listed in this paragraph (a). Each of the methods must be applied in accordance with all of the provisions of §1.482-1, including the best method rule of §1.482-1(c), the comparability analysis of §1.482-1(d), and the arm’s length range of §1.482-1(e). The methods are—
(1) The comparable uncontrolled price method, described in paragraph (b) of this section;
(2) The resale price method, described in paragraph (c) of this section;
(3) The cost plus method, described in paragraph (d) of this section;
(4) The comparable profits method, described in §1.482-5;
(5) The profit split method, described in §1.482-6; and
(6) Unspecified methods, described in paragraph (e) of this section.”
Any transfer pricing method which abide by the arm’s length principle is relevant to the determination of the transfer price of a controlled transaction.
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca
RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.
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