Page 62 - Strategic Tax Planning for Global Commerce & Investment

Tax Benefits for U.S. Exporters

PERMITTED TRANSFER PRICING METHODS UNDER OECD GUIDELINES

1) Comparable The CUP method compares the price charged for property or
Uncontrolled services transferred in a controlled transaction to the price charged
Price for property or services transferred in comparable uncontrolled
Method transaction in comparable circumstances
Transactional Methods 2) Resale Price to an independent entity. This price (the resale price) is then
(CUP)
The resale price method begins with the price at which the product
or service that has been purchased from a controlled entity is resold
reduced by an appropriate gross margin on this price (the resale
Method
price margin) representing the amount out of which the reseller
would seek to cover its selling and other operating expenses and in
light of the functions performed make an appropriate profit
of property or services in a controlled transaction for property
transferred or services provided to a controlled purchaser. An
3) Cost Plus The cost plus method begins with the cost incurred by the supplier
Method appropriate cost plus mark is then added to this cost to make an
appropriate profit in light of the functions performed and the
market conditions. What is arrived at after adding the cost plus
mark up to the above costs is regarded as the arm's-length price of
the original controlled transaction
4)Transactional
The transactional net margin method examines the net profit
Transactional Profit Methods (TNMM) manner similar to the cost plus and resale price methods.
relative to an appropriate base (i.e. costs, sales, assets) that an entity
Net Margin
Method
realizes from a controlled transaction. The TNMM operates in a
The transactional profit split method seeks to eliminate the effect
on profits of special conditions made or imposed in a controlled
transaction by determining the division of profits that independent
5) Transactiona
entities would have expected to realize from engaging in the
transaction or transactions. The transactional split method first
l Profit Split
identifies the profits to be split by the related entities and, then, it
Method
splits those combined profits between the associated entities on an
economically valid basis that approximates the division of profits
that would have been anticipated and reflected in an agreement
made at arm's-length
1. Comparable Uncontrolled Price Method (CUP)

The CUP method is the OECD preferred method and may be
used for transfers of both tangible and intangible property and
for the provision of services. The CUP method compares the
price charged in a controlled transaction to that charged in a

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