A transactional net margin method is unlikely to be reliable if each party to a transaction makes unique and valuable contributions, see paragraph 2.4. In such a case, a transactional profit split method will generally be the most appropriate method, see paragraph 2.119. However, a one-sided method (traditional transaction method or transactional net margin method) may be applicable in cases where one of the parties makes all the unique and valuable contributions involved in the controlled transaction, while the other party does not make any unique and valuable contribution. In such a case, the tested party should be the less complex one. See paragraphs 3.18-3.19 for a discussion of the notion of tested party.
TPG2022 Chapter II paragraph 2.65
Category: B. Transactional net margin method | Tag: Methods - strength and weaknesses, Tested party, Transactional net margin method (TNMM), Transactional profit methods, Transfer pricing methods, Unique and valuable contributions
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- TPG2022 Chapter II paragraph 2.69Another practical strength of the transactional net margin method is that, as with any one-sided method, it is necessary to examine a financial indicator for only one of the associated enterprises (the “tested” party). Similarly, it is often not necessary to state the...
- TPG2022 Chapter II paragraph 2.76The use of net profit indicators can potentially introduce a greater element of volatility into the determination of transfer prices for two reasons. First, net profit indicators can be influenced by some factors that do not have an effect (or have a less...
- TPG2022 Chapter II paragraph 2.72Like the resale price and cost plus methods, the transactional net margin method is applied to only one of the associated enterprises. The fact that many factors unrelated to transfer prices may affect net profits, in conjunction with the one-sided nature of the...
- TPG2022 Chapter II paragraph 2.70There are also a number of weaknesses to the transactional net margin method. The net profit indicator of a taxpayer can be influenced by some factors that would either not have an effect, or have a less substantial or direct effect, on price...
- TPG2022 Chapter II paragraph 2.68One strength of the transactional net margin method is that net profit indicators (e.g. return on assets, operating income to sales, and possibly other measures of net profit) are less affected by transactional differences than is the case with price, as used in...
- TPG2022 Chapter II paragraph 2.85Similarly, when analysing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when net profit indicators of an independent...
Related Case Law
- European Commission vs Amazon and Luxembourg, December 2023, European Court of Justice, Case No C‑457/21 PIn 2017 the European Commission concluded that Luxembourg had granted undue tax benefits to Amazon of around €250 million. According to the Commission, a tax ruling issued by Luxembourg in 2003 – and prolonged in 2011 – lowered the tax paid by Amazon...
- European Commission vs Amazon and Luxembourg, May 2021, European General Court, Case No T-816/17 and T-318/18In 2017 the European Commission concluded that Luxembourg granted undue tax benefits to Amazon of around €250 million. Following an in-depth investigation the Commission concluded that a tax ruling issued by Luxembourg in 2003, and prolonged in 2011, lowered the tax paid by...
- Greece vs X Ltd., May 2021, Administrative Tribunal, Case No 1674/2021This case deals with arm’s length pricing of limited risk manufacturing services. Following an audit of the X Ltd, the prices paid to a foreign manufacturer in the group was determined by the Grees tax authorities to have been above the arm’s length...
- Peru vs “Soybean-oil”, March 2023, Tax Court, Case No 02261-3-2023“Soybean-oil” had purchased crude soybean oil from a related party and used the CUP method to price the controlled transactions. The tax authorities disagreed with the choice of method and instead applied a TNMM. On that basis an assessment of additional taxable profits...
- India vs Toyota Kirloskar Motor Pvt. Ltd., January 2024, Income Tax Appellate Tribunal – BANGALORE, Case No IT(TP)A No.863/Bang/2023Toyota Kirloskar Motor Pvt. Ltd., challenged an assessment made by the tax authorities for FY 2018-19 regarding the separate benchmarking of royalty payments to its Associated Enterprises (AEs). The main issue related to whether royalty payments should be benchmarked separately or subsumed within...