Page 76 - Strategic Tax Planning for Global Commerce & Investment

Tax Benefits for U.S. Exporters

 The data is sufficiently complete
 It is likely that all material differences be-

tween the controlled and uncontrolled
transactions are identified
 The effects of the differences are definite
and reasonably ascertainable
 Reliable adjustments are made to account
for the differences

4. Transactional Net Margin Method (TNMM)

The transactional net margin method examines the net profit
margin relative to an appropriate base (i.e. costs, sales, assets)
realized on the transaction. The TNMM attempts to make
comparisons between financial indicators of the related parties
to the same indicators of similar entities.

The selection of an appropriate profit level indicator is an
important element of the proper application of the TNMM. It is
important to give proper consideration to the nature of the
business and other commercial considerations in doing so. For
example, a profit level indicator such as return on assets is more
likely to be suitable for a manufacturer with extensive capital
invested. In a similar fashion, operating margin or Berry ratio
are more likely to be suitable for a distributor with little capital
invested.

Procedures to Apply the Transactional Net Margin Method

1. First, determine the appropriate net profit
indicator for the entity with respect to the
controlled transaction, which should be cho-
sen, preferably, with reference to a net profit

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