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Preparing transfer pricing documentation is often demanding. Questions arise about which method should be chosen when the price for the transaction is to be determined. In this article, we will review some important points for the preparation of the documentation, and key elements when choosing a transfer pricing method.
The importance of choosing the right method for transfer pricing
The starting point is that companies that fall under the transfer pricing regulations and have a community of interest are free to choose which method they want when they calculate the price for the transaction.
There is, however, a requirement that the price should reflect equivalent values set according to market conditions as if the parties were not in a community of interest. Seen in the context of the fact that these are prices that must be documented based on a comparable basis, it will also be important to choose a method that will provide a comparable basis.
Also read: Transfer pricing when doing business in Norway
The process for preparing transfer pricing documentation
When transfer pricing documentation is to be prepared, this is often done in several steps to form a basis of comparison for the price determination.
When preparing transfer pricing documentation, a structured approach involving several key steps is typically followed.
- Mapping the transactions
- Mapping existing pricing principles
- Analyzing exposure and formal documentation requirements
- Preparing functional analysis
- Preparing economic analysis
- Completing documentation
- Implementing with agreements and routines
The extent of these procedures is contingent upon the nature of the business subject to regulatory oversight.
Which method is the right method?
When preparing the transfer pricing documentation, the evaluation and selection of the transfer pricing method is a critical aspect. The choice of method should be based on the specific characteristics of the transaction and the company's operations.
The OECD provides guidance on transfer pricing methods, and individual tax authorities may have their own preferences and guidelines. In the context of Norway, it's essential to consider their tax authorities' recommendations. Here's a summary of recommended methods by the OECD and the Norwegian tax authorities with some key differences:
CUP
The comparable uncontrolled price method (CUP) directly compares the selling price and assumes great product similarity between the two comparable products. This is an applicable method when comparing similar products. For example, standard products that are sold on a commodity exchange, provided that the products have been sold at the same time in the same quantities with the same delivery and payment conditions.
RPM
The resale price method (RPM) looks at the sales company's resale price to the external customers. This method can be considered for sales companies that buy and resell goods, and where the sales company does not change the goods significantly or the company owns major valuable intangible assets.
Cost+
The Cost+ method can be used for pricing products and services, when the tested group company has no intangible assets or other unique values. This method is particularly applicable when it is not possible to use the CUP method, and when it is a relatively simple production or service transaction.
TNMM
The transactional net margin method (TNMM) tests the net earnings of the simple company in a transaction, and the net margin is often assessed over a multi-year period. This method will be applicable if one of the parties to the transaction has unique and valuable values, and the other party does not.
PSM
The profit split method (PSM) distributes the profit based on the value of the parties' proportional contributions. This method requires that both parties to the transaction contribute unique and value-creating functions, assets and risks that are significant to the transaction.
In Magnus Legal, we have extensive experience in providing legal assistance regarding the determination of transfer pricing methods and maintaining documentation requirements for the authorities. Get in touch if you know or are in doubt as to whether these are regulations that concern you.