Meaning
Transfer pricing methodology that examines the net profit margin realized by a company from a controlled transaction relative to an appropriate base. The transactional net margin method compares the profitability of an intercompany deal with the margins earned by independent enterprises in similar circumstances.
Net Margin
Analysis focuses on the operating profit relative to sales or costs rather than the gross profit. The transactional net margin method requires a consistent application of the chosen profit level indicator over several fiscal years. Profits stay within the range.
Comparable Selection
Reliability of the result depends on finding third-party companies with similar functional profiles and risk levels. Analysts adjust the data to account for differences in market conditions and accounting practices between the tested party and the comparables used in the transactional net margin method study. This approach is often used when one of the parties performs complex functions that make a direct price comparison difficult.
Benchmarking provides the proof.
Regulatory Scrutiny
Adherence to the guidelines provided by the OECD ensures that the transfer pricing policy is defensible during a tax audit. Consistent application of the transactional net margin method across different regions helps the multinational group avoid the risk of double taxation.
