Transfer pricing methods. Review

Transfer pricing methods

OECD Guidelines indicated five transfer pricing methods that may be used to examine the arm’s-length nature of controlled transactions.

Traditional transaction methods:

1. Comparable prices method (CUP);
2. Resale price method (RPM);
3. Cost plus method (Cost plus);

Transactional profit methods:

4. Net trade margin method (TNMM);
5. Profit split method (PSM);

And any other method recognized in accordance with the OECD Transfer Pricing Guidelines, as well.

In the Republic of Moldova, the criteria for determining the most appropriate method are provided for in part (5) of Article 22620 of the Tax Code.

Service "Transfer Pricing Data in Moldova"

16. The comparable price method is a comparison of the price used in a controlled transaction with the prices used in uncontrolled transactions by independent persons when selling comparable goods, works and/or services.

17. The resale price method is used to determine the price used in controlled transactions by determining the price at which the goods or services acquired from an affiliate are resold to an independent person. The resale price is then reduced by the resale price markup.

The resale price margin consists of the expenses/costs incurred in the resale and the corresponding gross profit.

The price remaining after deducting the resale price margin from the resale price with the appropriate adjustment of other expenses/costs associated with the acquisition of the goods and/or services is the price determined in accordance with the arm's length principle for the original transaction between affiliates.

The resale price margin applied by an affiliate to goods and/or services purchased from another affiliate and sold to an independent person is comparable to the resale price margin applied to goods and/or services purchased and sold in uncontrolled transactions.

18. The cost plus method is used to determine the price applied in controlled transactions, where the price consists of the costs/expenses of producing/creating a product and/or providing a service with the addition of gross profit.

The cost plus method uses as a starting point the costs/expenses of producing/creating a product and/or providing a service incurred by an affiliate and delivered to another affiliate. Gross profit is added to these costs/expenses depending on the functions performed, the assumed risks, the assets used and market conditions.

The amount of gross profit applied by affiliates in a controlled transaction is comparable to the price margin applied by independent persons in uncontrolled transactions.

19. Net margin method is a comparison of the financial and economic indicators of profitability of an affiliate obtained in controlled transactions with the financial and economic indicators of profitability obtained by the same affiliate in transactions with independent persons, or the financial and economic indicators of profitability obtained by independent persons in uncontrolled transactions.

20. Profit split method is a comparison of the profit received by affiliates participating in one or more transactions and divided between them, with the profit that would be received and divided between independent persons. Profit distribution should be carried out by assessing the income received and expenses incurred as a result of one or more transactions of each person, depending on the functions performed, the risks assumed, the assets used and market conditions.

21. When applying the resale price, premium and net trade margin methods, a tested portion of the controlled transactions shall be selected for which the resale price margin, gross profit and profitability indicators are tested.

IV) Determining the comparable price range

22. Transactions between affiliates are considered to be concluded according to the arm's length principle if the profitability indicators or margin/result/transaction price fall between the lower quartile and the upper quartile of the comparable price range.

23. To establish the comparable price range, a range of values of the financial and economic indicators or margin/result/transaction price related to comparable transactions concluded between independent persons will be selected, and the lower and upper quartiles will be determined.

24. The lower quartile and the upper quartile represent the minimum and maximum values of the comparable price range.

25. If no more than two values of financial and economic indicators or margin/result/transaction price related to comparable transactions concluded between independent persons are identified, the range of comparable prices will be considered to be the range between the minimum and maximum values, and the median value will be determined by means of the arithmetic mean of the financial and economic indicators.