The selection of an appropriate transfer pricing method is the analytical core of any arm’s length inquiry. Transfer pricing methods are the techniques used to determine whether the price charged in a controlled transaction reflects what independent parties would have agreed under comparable circumstances. The arm’s length standard, codified in Article 9 of the OECD Model Tax Convention and implemented through domestic legislation in virtually every major jurisdiction, does not prescribe a single method but requires that the method chosen produce the most reliable measure of an arm’s length outcome for the specific transaction under review. Disputes over method selection therefore sit at the centre of most transfer pricing controversies.

Conflicts between taxpayers and tax authorities typically arise when a taxpayer applies one method and the authority substitutes another, arguing that the taxpayer’s chosen method fails to reflect the economic substance of the transaction. In the Kenya Beta Healthcare case, the authority replaced the taxpayer’s TNMM with a CUP, asserting that comparable uncontrolled prices existed for pharmaceutical products. In Poland, a manufacturer applying cost-plus was found to have provided insufficient evidence to support that method, leading the authority to apply the TNMM instead. In Germany, the Bundesfinanzhof examined the remuneration of a contract manufacturer in Bosnia-Herzegovina under the cost-plus and TNMM frameworks. The Swedish Shell case required the court to assess whether the CUP method was correctly applied to crude oil import pricing and freight charges between affiliates. The contested facts typically include the quality of comparables, the characterisation of the tested party, and whether adjustments have adequately eliminated material differences.

The governing framework is found in Chapters I through III of the OECD Transfer Pricing Guidelines. Chapter II (paras 2.1–2.11) establishes the five recognised methods — CUP, resale price, cost-plus, TNMM, and profit split — and requires application of the most appropriate method. The 2022 Guidelines reinforce that no method is inherently superior; hierarchy language was replaced in 2010 with the most-appropriate-method standard. Chapter III addresses comparability analysis, which is inseparable from method selection.

Courts and practitioners examine whether the taxpayer’s functional analysis correctly identifies the tested party, whether the comparables search is sufficiently rigorous, and whether adjustments for differences in accounting practices, asset intensity, or risk allocations are quantified and documented. The Terex Italy case illustrates how a credit note mechanism within a TNMM framework can itself become a point of dispute, requiring courts to assess whether the adjustment distorts the originally determined arm’s length margin.

Method selection cases collectively define the evidentiary and analytical standards that practitioners must meet to sustain a transfer pricing position, making this category essential reading for advisers and tax authorities alike.