While it is not specific to the transactional net margin method, the issue of the use of non-transactional third party data is in practice more acute when applying this method due to the heavy reliance on external comparables. The problem arises because there are often insufficient public data to allow for third party net profit indicators to be determined at transactional level. This is why there needs to be sufficient comparability between the controlled transaction and the comparable uncontrolled transactions. Given that often the only data available for the third parties are company-wide data, the functions performed by the third party in its total operations must be closely aligned to those functions performed by the tested party with respect to its controlled transactions in order to allow the former to be used to determine an arm’s length outcome for the latter. The overall objective is to determine a level of segmentation that provides reliable comparables for the controlled transaction, based on the facts and circumstances of the particular case. In case it is impossible in practice to achieve the transactional level set out as the ideal by these Guidelines, it is still important to try to find the most reliable comparables as discussed at paragraph 3.2, through making suitable adjustments based on the evidence that is available.
TPG2022 Chapter II paragraph 2.109
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By OECD
Category: OECD Transfer Pricing Guidelines (2022), TPG 2022 Chapter II: Transfer Pricing Methods | Tag: Insufficient data, Lack of public data, Lack of reliable information, Transactional net margin method (TNMM), Transfer pricing methods, Use of non-transactional third party data
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- TPG2022 Chapter II paragraph 2.112A similar approach may be required when there are differences in functions performed by the parties being compared. Assume that the facts are the same as in the example at paragraph 2.44 except that it is the comparable independent enterprises that perform the additional function of technical support and not...
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- TPG2022 Chapter II paragraph 2.102The use of budgeted costs can also raise a number of concerns where large differences between actual costs and budgeted costs result. Independent parties are not likely to set prices on the basis of budgeted costs without agreeing on what factors are to be taken into account in setting the...
Supplemental Guidance
- Poland issues tax clarifications on transfer pricing – No. 4: Transactional Net Margin Method (TNMM)1 December 2021 the Polish Ministry of Finance issued Tax clarifications on transfer pricing No. 4: Transactional Net Margin Method (TNMM) Clarification on application of the TNMM is provided in these areas: A. Principles of TNMM use A.1. Scope of application of the method A.2. Tested party A.3. Determination of...