TRANSFER PRICING CHEAT SHEET

OECD Risk Indicators The Transfer Pricing Lifecycle OECD Comparability Factors

Characteristics of Property and Services

Physical features, quality, and reliability of goods/services.

06 Functional Analysis
Significant Transfers of Business Audits & dispute 01 Functions, risks assumed, and assets used.
resolution TP strategy
transactions intangibles restructur- & policies Contractual Terms
with low tax to related ings How written or verbal contracts or agreements influence the
jurisdictions parties transaction conditions (like payment terms, warranties, etc.)

Economic Circumstances
05 Broader market conditions, like geographic location, market
Documen- 02 size, competition, consumer purchasing power, etc.
tation Price
setting Business Strategies
Specific Poor/Non- Significant Long-term commercial strategies such as market
types of existent variations in penetration, innovation, diversification.
payments documentation the effective
tax rate
04 Methods
Adjustments 03
Monitoring Comparable Uncontrolled Price (CUP) method
Compares the price charged in a controlled transaction to
the price charged in a comparable uncontrolled transaction.
Loss making Poor results Excessive debt Useful for commodity transactions, financial transactions,
and transactions with very reliable internal comparables

Resale Price Method (RPM)

OECD Local File Requirements Adjustments in Transfer Pricing Assesses the gross margin with which a product purchased in the
controlled transaction was resold in the uncontrolled transaction.
Management structure and business strategy, Comparability Adjustments Most appropriate for sales, marketing, and distribution
highlighting recent significant changes. transactions where internal comparables are available.
Changes that make the characteristics of uncontrolled transactions more
List of key competitors. comparable, enabling their use in transfer pricing method application.
Brief overview of controlled transactions.
Cost Plus Method (CPM)
Summary of intra-group payments/receipts per
transaction type and tax jurisdiction.
Year-End Adjustments Test the gross markup on costs incurred by an enterprise
during transactions with related parties.
Changes that taxpayers can make at year-end to bring the results of their
List of associated enterprises in transactions.
transactions into the arm’s length range. Suitable for manufacturing and service provision transactions
Copies of significant intercompany agreements. where internal comparables are available.
Summary of comparability and functional analysis, noting
year-to-year changes. Primary Adjustments
Transactional Net Margin Method (TNMM)
Identified transfer pricing method with justification. Adjustments to a company’s taxable profits made by a tax administration due
to the application of the arm’s length principle. These adjustments may lead to Tests the net (operating) profit earned by a tested party of a
Identification of tested party and reasoning. controlled transaction.
double taxation issues.
Summary of key assumptions in methodology. Often applied when a tested party can be identified, no
internal comparables are available and traditional methods
Justification for multi-year analysis, if relevant. are not reliable. TNMM is versatile and flexible and typically
Corresponding Adjustments relies on external comparables.
Overview of comparable transactions and related
financial indicators. Changes to the tax liability of a related party made by the second tax
jurisdiction corresponding to a primary adjustment. These adjustments are
Summary of comparability adjustments made. intended to resolve double taxation. Transactional Profit Split Method (PSM)
Justification for arm’s length pricing of transactions. Splits the profits to arrive at the result that would be
Summary of financial data used in methodology. achieved by independent parties in comparable transactions.

Copies of relevant APAs and other tax rulings. Secondary Adjustments Used for transactions where both parties make unique and
valuable contributions (such as intangibles), and/or
Annual financial accounts of the local entity. Constructive transactions introduced after a primary adjustment to align traditional methods are not appropriate due to the high
actual profit allocation with the primary adjustment. Can take the form of integration of business operations.
Schedules linking financial data with annual financial constructive dividends, equity contributions, or loans.
statements.
Summary schedules of financial data for comparables.
PLIs
Operating (net) margin Return on total costs
Typical Functional Profiles Applied to limited risk (also known as full
distributors (often used) cost mark-up or net
cost plus)
Limited Risk Fully Fledged
Operating (net) profit Applied to contract and
low-risk manufacturers,
Manufacturer Toll Manufacturer: Fully Fledged Manufacturer: Revenue
service providers, procurers
Manufacturing services without taking title to raw Performs all important manufacturing functions (often used)
materials or final products Engages in production planning, sourcing and
No inventory or selling risks procuring inputs, R&D activities, design and Return on assets
Limited quality control or logistics management Operating (net) profit
engineering, quality control, and logistics Applied to asset-intensive
No significant intangibles Assumes market risk, inventory risk, R&D risk, product Total Costs
industries (rarely used) (including CoGS and
liability risk, and other risks
Contract Manufacturer: Earns residual profit
operating expenses)
Manufacturing services with title to raw materials and Operating (net) profit
finished products
No risks associated with holding finished products or Operating System
selling them (usually only tangible assets) Return on
Bears stock risk related to raw materials capital employed
Applied to capital intensive
Berry Ratio industries (rarely used)
Distributor Agent: Fully Fledged Distributor: Applied to distributors,
procurers, & intermediaries Operating (net) profit
Acts as a sales representative, receives commission on sales Undertakes all of the sales and distribution functions (relatively often used) Capital employed
Facilitates sales, but principal concludes contract Bears all material risks relevant to these functions
Minimal risks since no title to the products Buys, holds, & sells products, develops necessary intangibles in a transaction
Gorss profit
Bears significant downside risks, as well as receiving upside
Limited Risk Distributor: results of positive outcomes of its activity Operating expense
Buys goods and markets them to customers Often entitled to residual profit
Risks relating to inventory and debtors are limited

Credits to
Provision of low value-adding or supportive services Provision of high value-adding or core services
Service No significant assets or risks Ownership of significant assets (e.g., unique skills,
Provider Predetermined routine return proprietary software, intangbiles)
Assumption of substantial operational and financial risks Borys Follow on
Potential for higher, non-routine returns
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