Specifically, different standards can be adopted for transfer pricing between affiliated enterprises, and the corresponding transfer pricing methods are comparable uncontrolled method (CUP), resale** method (RPM), cost plus method (Cost plus method) and other reasonable methods, including the comparable profit method (CPM), profit split method (PSM) and transaction net profit margin method (TNMM).
1.Cup is the abbreviation of comparable uncontrolled price method, and the corresponding Chinese expression is "comparable uncontrolled ** method".
The comparable uncontrolled approach refers to the method of pricing based on the same or similar business dealings between the parties to a transaction that are not related, and compares the amount received in a controlled transaction with the amount received in an uncontrolled transaction for comparable goods or services (including financing, intangible assets). When there is a discrepancy in **, it indicates that the conditions in the controlled transaction do not meet the arm's length transaction.
Comparable Uncontrolled** Method" use cases include:
Transactions of similar products: The CUP method is particularly useful when the products or services traded between companies have comparable independent transactions in the market. For example, raw materials or finished products traded between subsidiaries of a multinational corporation are widely traded in the market.
Sufficient comparable data: Comparable uncontrolled methods are particularly effective when there is a large amount of transaction** information on a particular good or service in the market. This requires sufficient market data to ensure the accuracy and reliability of the comparison.
Lending and financial transactions: For loans and other financial transactions, the CUP method can be used to compare interest rates and other trading conditions if there are a large number of similar arm-independent transactions in the market.
Intellectual property transactions: Transactions of intellectual property rights, such as patents and trademark rights, can also be used if there is comparable independent transaction data in the market.
Standardized or generic products: For standardized or widely traded products, such as certain commodities, chemical products or standard parts, the CUP method is more suitable because market information is usually more transparent and extensive.
2.RPM is the abbreviation of Resale Price Method, and the Chinese expression is "resale ** method".
The resale method refers to the fair market standard for determining such goods transactions between affiliates based on the amount of gross profit (purchase and sale difference) of the reseller after deducting the appropriate gross profit (purchase and sale difference) of the reseller after the purchase of the relevant goods by the affiliate to an unrelated third party (i.e., resale**).
Scenarios for the use of the "Resale** Act" include:
Distributor or dealer transactions: Resale** is particularly applicable when an entity within a group purchases a product and then sells it to an independent third party. For example, a subsidiary of a multinational company buys goods from another affiliate and then sells those goods to independent customers.
In the case of simple processing or minor alteration of the product: This method is also applicable if the purchased product has only been slightly processed or modified before being resold. The point is that the basic characteristics and values of commodities have not changed fundamentally.
Where comparable data is readily available: The resale** approach is particularly effective when resale** data on similar transactions between independent third parties is readily available. This is because the method requires a comparison of the differences between related-party transactions and independent third-party transactions.
Lower value-creating activities: For transactions that do not involve highly specialized or significant value-creating activities, such as the distribution of standardized products, the resale** approach is often more appropriate.
3.CPM is the abbreviation of cost-plus pricing method, and the corresponding Chinese expression is "cost-plus pricing method".
Cost-plus pricing is a pricing strategy that determines the sale of a product by adding a specific markup percentage to the product's unit cost. Essentially, a markup percentage is a method of generating a specific expected rate of return. Another pricing method is value-based pricing.
When applying the cost-plus method, the cost of providing a product or service (both direct and indirect costs) is first determined, and then the appropriate profit margin is added on top of that. This margin should reflect the profit that an independent business would have made in a similar transaction, taking into account the provider's functions, assets, and risks. In this way, it is possible to ensure that the related-party transaction reflects the principle of cost plus reasonable profit, and meets the requirements of international tax law.
Use cases for "cost-plus pricing" include:
Production or manufacturing operations: Cost-plus is particularly useful when a company supplies products to its affiliates, especially during manufacturing or production. This includes in-house sales of raw materials, semi-finished products or finished products.
Service Provision: The cost-plus approach also applies to the provision of services, such as managed services, technical support, or R&D services, if these services are primarily based on a cost-plus basis.
Cases with less comparable data: Cost-plus is a practical option when data on similar transactions by independent third parties in the market is not readily available. It focuses on the internal cost structure rather than the market**.
Transactions in the early stages of the value chain: This approach is suitable for transactions in the earlier stages of the value chain, such as raw materials**, initial processing, or component manufacturing, which are often more cost-based.
Standardized or non-unique products and services: For standardized products or services, especially those with many similar competing products or services in the market, the cost-plus approach provides an effective pricing mechanism.
4.psm is the abbreviation of comparable profit method, and the corresponding Chinese expression is "comparable profit method".
The comparable profit method refers to the transfer that should be used by the controlled taxpayer (the prosecuted party) in related party transactions based on the profit rate (profit level indicator) obtained by the non-controlled taxpayer (comparable party) and other non-controlled taxpayers in the same business activities under comparable circumstances**.
If the respondent's profit level indicator is consistent with the operating profit indicator of those non-controlled taxpayers, then the amount of the respondent's profit will be recognized as the result of arm's length dealing;However, if the profit level of the prosecuted party is inconsistent with the operating profit of the comparable party, the relevant tax authorities will have to adjust the profit level of the prosecuted party according to the operating profit indicator of the comparable party, and the comparable profit method is based on the assumption that in the long run, the taxpayer in the same situation should make the same profit. The comparable profit method can be used both for the transfer of intangible assets and for the sale of tangible goods.
This method was initiated by the United States, and in addition to the United States, only a few countries such as New Zealand, South Korea, Vietnam, and the Philippines have adopted it. Chinese tax law also allows for the use of the comparable profit method.
Scenarios for the use of the "comparable profit method" include:
Standardized transactions: The comparable profit method is particularly useful when the transaction involves standardized goods or services that are widely available in the market.
Cases where there are no comparable arm's length transactions: In the absence of comparable data on independent third-party transactions that are identical or very similar to intra-group transactions, the comparable profit method can be an effective alternative.
Fewer value-creating activities: This approach is often more appropriate for transactions that do not involve highly specialized skills or significant value-creating activities, such as simple manufacturing, distribution, or certain support services.
Less risk and assets for related parties: When a related party primarily performs routine operations, takes less risk, and requires less assets and capital investment, the comparable profit method is appropriate.
Situations where large amounts of industry data are available: The comparable profit method can be applied effectively when a large amount of financial and operational data for independent businesses within an industry is available. By comparing the profit margins of related parties with those of similar independent enterprises, it is possible to determine whether the transfer** is fair.
5.tnmm is the abbreviation of transactional net margin method, and the corresponding Chinese expression is "transaction net profit method".
The transaction net profit margin method refers to the method of determining profits based on the level of net profits obtained by the parties to a transaction that are not related to each other from the same or similar business dealings. The transactional net profit method refers to the marginal net profit realized by a taxpayer from a controlled transaction relative to a reasonable base (e.g., costs, sales, assets).
The trading net profit method is a complete net profit method, which is the profit after excluding all operating expenses. Generally, when the gross profit cannot be determined, the net profit method of the transaction is considered.
Choosing the correct "net profit" is the key to using the transaction net profit method, and when adjusting the transfer pricing for affiliated enterprises engaged in labor and distribution business, the return on sales is generally used to calculate the adjustmentWhen adjusting transfer pricing for manufacturers, the cost rate of return is generally used to calculate the adjustment amount.
Scenarios for the use of the "Transactional Net Profit Method" include:
Routine: TNMM is often the appropriate choice when the transaction involves standardized, routine business activities, such as manufacturing, distribution, or certain types of service provision.
Cases where there are no comparable arm's length transactions: TNMM can be an effective alternative if there is a lack of comparable data on independent third-party transactions that are identical or very similar to intra-group transactions.
Related-party exposure to less risk and assets: For those related-party parties that primarily perform routine operations, take on less risk, and require less assets and capital investment.
Situations where large amounts of industry data are available: TNMM can be used effectively when there is access to a large amount of financial and operational data from independent companies within an industry. This method determines whether a transfer** is justified by comparing the net profit margin of a related party with the net profit margin of a similar independent business.
Non-core business activities: TNMM is often a viable option for those activities that are not the core business of the company, especially those that do not involve special or unique skills, intellectual property or other assets of value.
Feasibility of data and analysis: Where it is determined that other transfer pricing methods are difficult to apply or difficult to access, the net profit margin data for TNMM analysis may be more appropriate if the net profit margin data for TNMM analysis is readily available.
It is important to note that the comparable profit method is also known as the "transactional net profit method" in some countries.
*: Translation.