In applying a cost-based transactional net margin method, fully loaded costs are often used, including all the direct and indirect costs attributable to the activity or transaction, together with an appropriate allocation in respect of the overheads of the business. The question can arise whether and to what extent it is acceptable at arm’s length to treat a significant portion of the taxpayer’s costs as pass-through costs to which no profit element is attributed (i.e. as costs which are potentially excludable from the denominator of the net profit indicator). This depends on the extent to which an independent party in comparable circumstances would agree not to earn a mark-up on part of the costs it incurs. The response should not be based on the classification of costs as “internal” or “external” costs, but rather on a comparability (including functional) analysis. See paragraph 7.34.
TPG2022 Chapter II paragraph 2.99
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By OECD
Category: OECD Transfer Pricing Guidelines (2022), TPG 2022 Chapter II: Transfer Pricing Methods | Tag: Denominator - costs, Denominator - full costs, Key is to compare like with like, Net Profit Indicator/Profit Level Indicator (PLI), Pass through costs, Transactional net margin method (TNMM), Transactional profit methods, Transfer pricing methods
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Supplemental Guidance
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