TNTMIPS COMPACT RATIO PLUS

An example is costs that can be either qualified as “costs of goods sold” or “operating costs.” This net comparison is not allowed under the traditional transactions method Cost Plus Method. By using this ratio, the comparison eliminates differences resulting from categorizing costs. The Net Cost Plus Margin basically measures the return on total costs of a company. The Net Cost Plus Margin is the ratio of operating profit to total cost.Īs “Operating profit” usually Earnings before Interest and Taxes is used, or simply “EBIT.” Total cost means the direct and indirect operational costs without extraordinary items. We will now explain two examples of commonly used net profit indicators: the “Net Cost Plus Margin” and the “Net Resale Minus Margin.” This is a ratio of net profit relative to a base, such as “costs,” “sales” or “assets.” The net profit indicator that a taxpayer realizes from a controlled transaction, is compared with the net profit earned in comparable uncontrolled transactions. The most important aspect of the TNMM is the “net profit indicator.” TNMM’s Key Element: The Net Profit Indicator Let’s see how this looks in this example: This increases the amount of situations where the TNMM can be used.Ī comparable uncontrolled transaction can be between an associated enterprise and an independent enterprise (internal comparable) and between two independent enterprises (external comparables). “Broadly similar” in this context means that the compared transactions don’t have to be exactly like the controlled transaction.

This net profit is then compared to the net profit realized by comparable uncontrolled transactions of independent enterprises.Īs opposed to other transfer pricing methods, the TNMM requires transactions to be “broadly similar” to qualify as comparable. With the TNMM, you need to determine the net profit of a controlled transaction of an associated enterprise (tested party). It then compares the profit level to the profit level realized by independent enterprises engaging in comparable transactions. The Transactional Net Margin Method is a transactional profit method.Ī transactional profit method measures the net operating profits realized from controlled transactions. The methods split up into “traditional transaction methods” and “transactional profit methods.” The OECD Transfer Pricing Guidelines (the OECD Guidelines) provide 5 common transfer pricing methods, accepted by nearly all tax authorities. What Kind Of Transfer Pricing Method Is The TNMM? But with the example, it will become clear quickly.īefore we continue, it is important to understand that the Transactional Net Margin Method is one of the five common transfer pricing methods used to examine the “arm’s-length” nature of “controlled transactions.” If these terms don’t ring a bell, we advise you to first read our articles What Is Transfer Pricing? and Five Transfer Pricing Methods with Examples. Some of the terms used might be confusing at first. If you are looking for more information about the Transactional Net Margin Method (TNMM), you have come to the right place.īelow, we explain this transfer pricing method in more detail and explain when and how you can use it.

Tntmips compact ratio