Transfer Pricing Methods

In practice, when determining the arm’s length price of a transaction – the key question that a transfer pricing analyst would ask is how to apply the arm’s length principle? There are several transfer pricing methods that exists to provide a conceptual framework in determining the arm’s length price.

These methods directly and indirectly relies on the comparable profit margin of similar transactions. The information may be derived from an internal comparable (i.e. similar uncontrolled transaction between the entity and 3rd party) or external comparable (i.e. involving independent parties within the same market / industry).

There are five major transfer pricing methods

  • Comparable Uncontrolled Price (CUP)
  • Resale Price Method
  • Cost Plus Method
  • Profit Split Method
  • Transactional Net Margin Method

The first three method mentioned above are often referred to as the traditional transaction methods, where the remaining last two methods as the profit-based methods. All of these methods are widely used and accepted by the national tax authorities.

Note: Under the USA regulations, there is an additional transfer pricing method which is applicable at the global level of operations. The additional method is referred to as the Comparable Uncontrolled Transactions (CUT) method. This method is similar applied to CUP method. It determines the arm’s length royalty rate for an intangible by comparing the uncontrolled transfers  of comparable intangible property in comparable circumstances.


United Nations Practical Manual on Transfer Pricing for Developing Countries (2017)


The United Nation Practical Manual on Transfer Pricing for Developing Countries was launched and distributed in digital format on 7th April 2017. The TP Manual provides a great assistance to the developing countries to counter and mitigate the risks of profit shifting.

The updated version adopted a new format. The manual is divided into four (4) parts for better clarity and understanding:

  • Part A: This section related to the Transfer Pricing in a global environment
  • Part B: The guidance on design principles and policy considerations
  • Part C: The practical implementation of a transfer pricing regime in developing countries; and
  • Part D: Country practices. This section includes other statements updated and presented by Brazil, India, China and South Africa.

Apart from its presentations and changes to the manual, the 2nd edition of the UN Transfer Practical Manual on Transfer Pricing also includes some new chapters on intra-group services, cost contribution arrangements, the treatment of intangibles, significant updates of other chapters, etc.

In short, this is a timely and essential update provided by the United Nations for the developing countries whom wishes to adopt, implement or further improve the transfer pricing regulations.


United Nation on Practical Transfer Pricing issues

This blog essentially shares the materials prepared by the Members of the United Nations Tax Committee’s Subcommittee on the Practical Transfer Pricing issues.

According to the, United Nation released a revised and updated manual 2017 that is designed to give concrete advice to the developing nations on administering transfer pricing laws.

For further information, please click here.


An Overview of Transfer Pricing – UN Model Convention


The UN Model Convention gives a brief outline on the subject of Transfer Pricing by addressing the practical issues, concerns surrounding it, and the approach taken by the developing countries.

The transfer pricing determines the income of two or more parties involved in cross border transaction. Thus, the concept underlying the transfer pricing shapes the tax base of the countries that are involved in the cross border transactions.

The issue of cross border transactions generally involves the countries’ tax jurisdiction, allocation and the valuation. Therefore, when a tax jurisdiction from one country taxes the MNE Group, it has an effect on the tax base of another country.

Jurisdictional issues

The jurisdictional issues brings a new spectre to the transfer pricing issue where MNE’s manipulates to shift profits in order to reduce the aggregate tax burden of the multinational group. It is important to note that the aim of reducing taxation is an important key. This is in order to set the transfer prices for intra-group transactions, whereby it can be the only contribution factor to the transfer pricing policies.

Despite the obvious motivated issue to reduce the multinational group’s taxation, i.e. by shifting profits from a high tax countries to relatively lower tax countries via the intra-group trade, the transfer pricing related issue throws an open hot issue, the complexities, and the magnitude of the problems that are often faced the tax administrations.

Allocation issues

MNE shares common resources and overheads. From its perspective, these resources are required to be allocated in the most optimal manner. However from the government’s perspective, the allocation of resources (i.e. income and cost) from MNE is required to be addressed for taxation purposes. Despite between some countries, there may be a taxation dispute in terms of deciding the allocation of cost and resources towards maximizing the tax base in respective nation.

Valuation issues

Apart from the allocation of resources, valuation is the key issue of transfer pricing, i.e. the valuation of intra-firms transfers. The integration of the entities contributes to the ability to exploit international differentials and utilized the economies of integration that are not made easily available to the domestic firms.

Generally, the tension that underlies between the common goals of the MNEs and overall social goals of the developing nation is perceived to be the responsibility of the MNEs. The utilization of the resources increases the profits. This however can seem to be in contrast with the social, economic and political consideration of the countries. With so many complexities forces at hand, it is evidently clear as to why the discussion of international taxation is an open-ended problem with transfer pricing at its heart.


Transfer pricing regulations are essential for the countries in order to protect the taxation base, eliminate the double taxation and to enhance the cross border trade.