Common Transfer Pricing Methods and Their Applications

Transfer pricing is a way for companies with branches or related businesses in different countries to set prices when they buy or sell goods, services, or assets between themselves. This helps avoid tax issues and keeps things fair.

The topic of transfer pricing in UAE is growing as more businesses look for ways to manage their tax matters smoothly.

The Comparable Uncontrolled Price (CUP) Method:

One common method is the Comparable Uncontrolled Price or CUP method. It compares the price of goods or services sold between related companies to the price charged between independent companies for similar deals. If the prices are close, it shows the related companies are setting fair prices. This method works well when there are similar deals happening outside the company that can be compared easily.

The Resale Price Method:

The Resale Price Method is used when one company buys products from a related company and then sells them to an independent buyer. The price is found by looking at how much the reseller sells the product for and then subtracting a fair profit margin. This shows what the reseller likely paid to the related company. This method is helpful when the reseller doesn’t make many changes to the product.

The Cost Plus Method:

The Cost Plus Method adds a fair profit margin to the cost of making a product or offering a service. It is common when a company makes products or provides services to a related company. The profit added is based on what other companies usually earn in similar business situations. This method is good when the costs and work involved are easy to identify.

The Transactional Net Margin Method (TNMM):

TNMM looks at the profit margin compared to costs, sales, or assets and compares this with independent companies in similar industries. It is a flexible method used when other methods are harder to apply. TNMM helps check if the company’s profit level matches what independent companies would earn in similar deals.

The Profit Split Method:

This method divides the total profit from transactions between related companies based on how much each contributed. It works best when companies are closely linked and both add value, like through technology, marketing, or manufacturing.

Each transfer pricing method has its strengths and suits certain situations. Companies review their options carefully to pick the one that fits their business and local rules.