Types Of Transfer Pricing
There are five types of transfer pricing methods that can be applied. Three of the five are traditional pricing methods while the last two are transactional pricing methods.
Traditional Pricing Methods
1) The CUP Method
2) The Resale Price Method
When this is done, the costs associated with the purchase or the products, such as custom duties are deducted from the price. After all the deductions, what is left is the arm’s length price for the controlled transaction between associated enterprises.
3) The Cost Plus Method
After adding this markup to the cost, it can then be considered at arm’s length. When applying this method, you are required to identify a mark-up on costs applied for comparable transactions between independent entities. This has to be done before this method can be applied.
Transactional Pricing Methods
Unlike the traditional method, this method does not measure actual transactions. Rather this method measures the net operating profits that are gotten from controlled transactions and compares them to profit level realized by independent enterprises that are engaged in comparable transactions. There are two types of price transfer methods under this.
1) The Transactional Net Margin Method (TNMM)
This method requires that the transactions are broadly similar before they can be compared. For this method, a comparable uncontrolled transaction can be between a related enterprise and an independent enterprise or between two independent enterprises.
2) The Profit Split Method
There are times when associated enterprises engage in transactions that are interrelated. This means that these transactions cannot be examined on separate basis. For transactions in this category, associated enterprises just split the profits realized.
This method looks at the terms and conditions of these transactions by extrapolating the division of profits that independent enterprises would realize from participating in those transactions.
These are the different types of transfer pricing. Still have questions? Please feel free to get in touch with us.