Transfer Pricing

Transfer pricing techniques are used to determine trade prices for commodities or services
among related businesses or organisations. Transfer pricing improves pricing, promotes
efficiency, and aids in the simplicity of accounting processes. It also allows for labour cost
savings by optimising procedures and systems. Transfer pricing is concerned with company
operations strategy while also assisting in the generation of higher profits.
There are five methods; four are considered unilateral (comparable uncontrolled price
method, resale price method, cost-plus method, and transactional net margin method) because
the relevant financial indicator is only examined for one of the related parties (the tested
party) to the transaction; and one is considered combined (profit split method), because the
combined method is more effective than the individual methods based on contribution
analysis.
 Comparable uncontrolled price method: This method compares the price charged in the
related-party transaction to: the price of a comparable transaction between the related
party and an unrelated party (the internal price) or the price of a comparable transaction
with a different unrelated person (the external price).
 Resale price method: This method compares the reseller's resale price margin (gross
profit margin) in a deal involving related parties to the reseller's resale price margin
(gross profit margin) on goods bought and sold in comparable uncontrolled deals (internal
comparable deals), or to the resale price margin (gross profit margin) earned by unrelated
parties in comparable uncontrolled deals (external comparable transactions).
 Cost-plus method: The method compares the seller's cost mark-up in related-party
transactions to either: the seller's cost mark-up in a comparable uncontrolled transaction
or the cost mark-up utilised by unrelated parties in comparable uncontrolled transactions.
 Transactional net margin method: This method compares the taxpayer's net margin
indicator in the controlled transaction to either the taxpayer's net margin indicator in a
comparable uncontrolled transaction or the net margin indicator made by unrelated parties
in controlled transactions.
 Profit split method: Using this method, the total (combined) profit earned by linked
parties in mutual transactions is initially allocated among the parties engaged on the basis
of each party's contribution to the transaction's value creation on an economically sound
basis.