What Transfer Pricing Methods Can Your Company Use?

• Learn more about the different transfer pricing methods. 
• Identify which of the transfer pricing methods you can use for your own transactions. 
• Determine the advantages and disadvantages of the transfer pricing methods in this article. 

Transfer pricing is a strategy that many international companies employ because it allows them to leverage its key resources strategically while legally avoiding the risk of double taxation and penalties. However, they still need to follow the rules that the OECD (Organization for Economic Cooperation and Development) established and the transfer pricing regulations that their local jurisdiction has.  

The companies that leverage the benefits of transfer pricing follow the Arm’s Length Principle. The latter specifies that whenever transfer pricing occurs between related parties, their transactions should be as if they’re independent companies. This is the internationally recognized standard for transfer pricing between associated enterprises. 

What are the different transfer pricing methods you can implement? 

Comparable Uncontrolled Price Method 

As its name suggests, this transfer pricing method finds a similar transaction that took place between independent companies and then charges a comparable price for products bought or services paid for between associated companies. This method is easy to apply when you can find a similar transaction to what you intend to do. 

Pros:  

1. This method allows you to make an accurate comparison of prices whenever you transact with both related and independent parties. 
2. Tax authorities prefer this transfer pricing method if companies can identify a comparable transaction. 

Cons: 

1. You might have a difficult time finding a comparable transaction you can base your transfer pricing on due to absence of publicly available data. 
2. You might have to make adjustments before you can establish the transfer price agreeable to all parties.  

Resale Price Method 

This transfer pricing method follows when the price of a product or service bought from an associated party is resold to another independent company. The gross margin covers expenses that create profits which also lead to the transfer price. 

Pros: 

1. This transfer pricing method is easier to implement with products with not much differentiation. 
2. Applicable for distributors that don’t add substantial value to an item or service. 

Cons: 

1. It’s difficult to identify a resale margin using this transfer pricing method when there is no basis for comparison. 
2. This method is ineffective when products go through significant value-adding customizations before reselling. 

Cost Plus Method 

One of the transfer pricing methods you can follow is cost plus. This method adds a markup to the production cost of a service or product sold between associated companies. This method is effective when there’s no direct price for single services or products. 

Pros: 

1. The cost plus transfer pricing method is transparent because you begin calculations from known expenses.  
2. Manufacturing, assembly, or other production of goods companies normally benefit from the cost plus method because they meticulously document production expenses.  

Cons: 

1. It’s difficult to identify a profit margin due to limited market data. 
2. Expenses classifications may vary per company due to differences in accounting principles employed as well as the basis of the costs used. 

Profit Split Method 

The profit split approach distributes controlled transactions’ profits to a parent company’s subsidiaries and/or branch offices depending on an assessment of risks, functions, and assets they use. 

Pros: 

1. This transfer pricing method is based on economic realities. 
2. This can be an effective method when undergoing integrated transactions and if you have a hard time looking for comparable transactions. 

Cons:  

1. The complexity of this transfer pricing method makes it difficult to implement. 
2. You’ll need more data and analysis before implementation. 

Transactional Net Margin Method 

This method reviews a party’s net margin under a regulated transaction and contrasts it with a comparable company’s net margin on unregulated transactions.  

Pros: 

1. This provides companies with flexibility and a broader measure of comparability. 
2. You can implement this transfer pricing method on various transactions since this is less affected by specific product or service-type differences. 

Cons: 

1. This approach isn’t as direct compared to methods that use price as their basis. 
2. You might have to implement complicated adjustments to reach a transfer price. 

The abovementioned methods allow you to leverage transfer pricing. There is no specific preference for any one method but the method that produces the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments, should be utilized.  

Compare the different transfer pricing methods so that you’ll know which one is the most effective for you. You’ll need the services of an experienced team to make sure the transactions follow government laws and regulations so that you are 100% compliant. Manila Bookkeepers can provide you with the transfer pricing services you’re looking for. 

How does your company benefit from transfer pricing? 

Multinational companies implement transfer pricing because of the advantages it provides them. These are some of its benefits: 

• Transfer pricing allows you to improve your budgeting strategy. You can distribute and balance costs across your branch offices or subsidiaries. Transfer pricing also enables you to improve the cash flow of your subsidiaries and branch offices. 
• Transfer pricing allows you to get updated financial data for your reports. You can use the information for planning and budgeting. 
• You can reduce the costs of your company through transfer pricing. You can transfer products and services to a subsidiary and/or branch office in another country that incurs a lower tax rate. Lower taxes also boost your profits. 
• You can avoid double taxation and prevent adjustments arising from transfer pricing examinations. 
• Following the principle of transfer pricing allows you to comply with international laws even if you’re leveraging the lower tax rates of other countries. 

These are the advantages of transfer pricing you can look into to determine if this strategy is suitable for your company. This strategy still comes with risks such as disagreements among parties involved regarding the price of services or goods. You’ll have to provide detailed documents to avoid penalties and audits. The extra hours your team needs for transfer pricing will add to your business expenses. If your team lacks expertise in transfer pricing, they might make a lot of mistakes that will delay the whole process. In such cases, you can reduce your risks if you seek out and partner with an accounting firm in Makati. 

The Manila Bookkeepers team can provide you with the assistance you need for successful transfer pricing. We can prepare the necessary paperwork and attachments, recommend improvements, evaluate and compare transactions, and identify a suitable transfer pricing method that can work for you. Contact the team to learn more about what they can do for you.