Key points
- The core principle is the arm’s length principle: prices between related parties should match those agreed between unrelated parties under the same or similar conditions.
- Common methods: comparable uncontrolled price (CUP), resale price method (RPM), cost plus method (CPLM), transactional net margin method (TNMM) and profit split method (PSM).
- Cross-border related-party transactions are also affected by rules arising from the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action Plan, under which many countries have strengthened documentation and disclosure requirements.
In practice
In a group trade chain, transfer pricing decides which entity keeps the profit and in which tax jurisdiction it is taxed. A common approach is to set a pricing rule for each type of internal transaction – for example an external comparable price plus or minus a fixed fee, or a reasonable gross margin range retained by the distribution entity, with the remaining profit going to the entity that bears the principal risks.
The hard part is consistent execution. The rules are written into policy documents, but whether each internal price was actually generated by the rule, how far it deviated and whether each entity’s full-year margin falls within the target range are often only known at year end. Good practice is to calculate internal prices by rule, with a record, at the moment each transaction takes place, monitor each entity’s margin regularly, and build up the data for contemporaneous documentation.
How Tranexio supports it
Within a trade chain, Tranexio allocates profit to each entity according to configured transfer pricing rules (CUP, RPM, cost plus, TNMM, PSM), records each internal transaction price and its basis, and provides a BEPS compliance self-check. See Trade chain management and transfer pricing.