Resources
The terms that appear throughout this site and in every transfer pricing file, written the way we would explain them on a call rather than the way they appear in the guidelines.
The rule underneath all of it: transactions between related parties should be priced as they would have been between independent parties in comparable circumstances. Everything else, methods, benchmarks, documentation, exists to demonstrate that this has been done.
Turning a transfer pricing policy into actual numbers in actual accounts, period after period. Assembling the cost base, applying the allocation key and the mark-up, producing the charge, posting it, and being able to show the trail. The gap between policy and ledger is where most transfer pricing effort is really spent.
An assessment of the functions performed, assets used and risks assumed by each party to a controlled transaction. It determines which entity is tested and what return it should earn. Usually the most re-gathered document in the whole cycle.
Where value is created across the group as a whole, rather than where invoices are issued. Supports entity characterisation and is often requested when a tax authority wants to understand or challenge a profit allocation.
Development, enhancement, maintenance, protection and exploitation. The framework for deciding who is entitled to intangible-related returns: legal ownership alone is not enough, the entity performing and controlling the DEMPE functions is what matters.
Pricing a controlled transaction directly against the price charged in a comparable uncontrolled transaction. The most direct method and the most demanding on comparability. Used in TPMP for royalties, services and financing.
Tests the net profit margin a party earns against the margins earned by comparable independent companies. The workhorse for routine distributors, service providers and contract manufacturers, because it tolerates imperfect product comparability better than the price-based methods.
The ratio being tested under TNMM, for example net cost plus for a service provider, operating margin for a distributor, or return on assets for a manufacturer. Chosen at the design stage, because everything downstream is measured against it.
A search for independent companies or transactions comparable to the tested one, screened on activity, independence, geography and financial data, and reduced to a range of arm's length outcomes. Typically refreshed on a three-year cycle with financial data updated annually.
The middle half of the results from a benchmarking study, from the 25th to the 75th percentile, commonly used as the arm's length range. Landing inside it is the objective; the year-end adjustment exists to get there.
A correction posted before the accounts close to bring a tested party's result back inside the arm's length range. Has knock-on effects for VAT and customs, which is why it is better modelled in advance than discovered in December.
The contract between related parties setting out what is supplied, on what terms, and at what price. Its job is to say the same thing the calculations do; where it does not, the file is weaker than it looks.
The group level documentation component: structure, business description, intangibles, intercompany financing, and the group's financial and tax positions. Written once for the group.
The entity level component: the local entity, its controlled transactions, functional analysis, method selection, economic analysis and financial information reconciled to the statutory accounts.
An annual group report allocating revenue, profit, tax, employees and assets across jurisdictions, required of groups above a consolidated revenue threshold, together with notifications in each relevant jurisdiction. A risk assessment tool for tax authorities rather than a pricing document.
Whether an entity is funded with more intra-group debt than it could have borrowed at arm's length. Tested alongside interest deduction limitation rules, which cap the deduction regardless of whether the rate itself is arm's length.
Tax deducted at source on cross-border payments such as royalties, interest and sometimes service fees. Relevant to transfer pricing because the pricing decision determines the size of the payment, and treaty relief usually needs supporting documentation.
A taxable presence created in a jurisdiction by the way a group actually operates there, regardless of whether an entity has been incorporated. Worth checking at the design stage, because a pricing arrangement can create one by accident.
An agreement with one or more tax authorities fixing the transfer pricing method for a transaction over a future period. Slow and demanding to obtain, and valuable where the amounts are large enough that certainty is worth more than flexibility.
A cross-border reallocation of functions, assets or risks within a group. The transfer pricing question is whether something of value moved and whether an independent party would have been compensated for giving it up.
Nothing matches that. Try a shorter word.
TPMP