Transfer Pricing

• Transfer pricing is the setting of the price for

goods and services sold between controlled
(or related) legal entities within an enterprise.
For example, if a subsidiary company sells
goods to a parent company, the cost of those
goods paid by the parent to the subsidiary is
the transfer price
 Comparable Uncontrolled Pricing
•  The Cup Method
• The CUP Method compares the terms and
conditions (including the price) of a controlled
transaction to those of a third party transaction.
There are two kinds of third party transactions.
• Firstly, a transaction between the taxpayer and
an independent enterprise (Internal Cup).
• Secondly, a transaction between two
independent enterprises (External Cup).
 The Resale Price Method

• As a starting position, it takes the price at which an

associated enterprise sells a product to a third party. This
price is called a “resale price.”
• Then, the resale price is reduced with a gross margin (the
“resale price margin”), determined by comparing gross
margins in comparable uncontrolled transactions. After
this, the costs associated with the purchase of the
product, like custom duties, are deducted.
• What is left, can be regarded as an arm’s length price for
the controlled transaction between associated enterprises.
 The Cost Plus Method

• With the Cost Plus Method, you focus on the costs of a

supplier of property or services in a controlled
transaction. Once you know the costs, you add a mark-
up. That mark-up should reflects the profit for the
associated enterprise on the basis of functions and risks
performed. The result is an arms’ length price.
• In general, the mark-up in a cost plus method will be
computed after direct and indirect costs of production or
supply. However, operating expenses of the enterprise
such as overhead expenses are not part of the mark up.
 The Transactional Net Margin Method

• It is generally adopted when all other methods are

not applicable
• A comparable uncontrolled transaction can be
between an associated enterprise and an
independent enterprise (internal comparable) and
between two independent enterprises (external
comparables).
• Total amount of net margin arrived by both
companies are used for calculating net margin in
transactions
  The Profit Split Method

• Associated enterprises sometimes engage in transactions

that are very interrelated. Therefore, they cannot be
examined on a separate basis. For these types of
transactions, associated enterprises normally agree to split
the profits.
• The Profit Split Method examines the terms and
conditions of these types of controlled transactions by
determining the division of profits that independent
enterprises would have realized from engaging in those
transactions.
• Applied mostly in case of antique products or services