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Difination
In this method, price charged in an uncontrolled deal between comparable entities is recognized
and evaluate with the verified entity price to determine the Arms Length Principle.
The CUP method offer the finest evidence of ALP. A arms length price may arise where:
Tax payer or another member of the associate group sells the product, in comparable
sizes and in the comparable terms to ALP in similar promote markets (internal
comparable).
An ALP party sells the similar product, in similar size of quantity and in the comparable
conditions to other arms length party in similar markets (an external comparable).
The taxpayer of the entities buys the similar quantities, in comparable quantities and in
the similar terms from the associate parties in the comparable markets (internal
comparable).
An ALP party buys the particular goods, in comparable quantities and in the similar
terms from the other arms length associate party in similar markets (external
comparable).
Transfer pricing documentation
View this page in: Slovenina
An increasing number of countries are implementing laws regarding the preparation of transfer
pricing documentation. With the new provisions of the Slovenian CIT Act in respect of
transactions between related parties, effective as from 1 January 2005, Slovenia has joined those
countries. PricewaterhouseCoopers is able to help you to prepare consistent documentation for
all types of inter-company transactions in compliance with local regulations.
Documentation process
Transfer pricing documentation contains the disclosure of a complete transfer pricing analysis,
which usually includes:
This analysis involves an examination of the market in which the relevant commercial relations
occur (including factors such as industry structure, market share and trends, substitute goods,
etc.). The purpose of this analysis is to identify the industry sources of competitive advantages,
key processes and value drivers, key risks and influences on pricing. The documentation should
contain company analysis aiming at the identification of the enterprise specific value adding
activities or sources of competitive advantages in accordance with the management model,
business strategy and responsibility structure.
Functional analysis
The purpose of this analysis is to identify the role of each participant in a related party
transaction i.e. functions performed, risks borne and resources (including intangible assets) used.
The relative compensation earned should generally correspond to their relative contribution.
The economic analysis starts with determining the actual legal and managerial profile of an
enterprise. This background will allow better selection of the appropriate transfer pricing method
and the definition of comparable search criteria. The objective of these criteria is to identify
comparable transactions (benchmarking) that allow the assessment of the arms length price of
the relevant transaction.
Financial analysis
Financial analysis applies the results of economic analysis to the tested inter-company
transactions, in order to compare the prices applied among related business entities with the
range of arms length prices, by using financial indexes. An adjustment would be necessary if the
analysis identifies a significant difference between the indicators of the company and those of
comparable companies.
This scheme can be tailored to suit your needs and requirements. The first step in the process is
the prioritization, analysis and formation of a core file of documents. It consists of group wide
information, applicable to all countries. In the second phase, local economic analysis and
presentation may be added to form a local report. Distinguishing core from local is a dynamic
process and corresponds to your specific needs and the risks that your operation might be facing.
In this respect, it reflects both the operational and tax objectives of the business.
Ratios
Profitability ratios
Profitability ratios measure the company's use of its assets and control of its expenses to generate
an acceptable rate of return
:::OR :::
Operating margin, Operating Income Margin, Operating profit margin or Return on sales
(ROS)[8][9]
Note: Operating income is the difference between operating revenues and operating expenses,
but it is also sometimes used as a synonym for EBIT and operating profit.[10] This is true if the
firm has no non-operating income. (Earnings before interest and taxes / Sales[11][12])
:::OR :::
Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity
Efficiency ratio
Net gearing
Cash ratio[17]
DSO Ratio.[18]
Asset turnover[19]
Debt ratios quantify the firm's ability to repay long-term debt. Debt ratios measure financial
leverage.
Debt ratio[23]
OR
Market ratios measure investor response to owning a company's stock and also the cost of
issuing stock. These are concerned with the return on investment for shareholders, and with the
relationship between return and the value of an investment in companys shares.
Payout ratio[25][26]
OR
P/E ratio
Dividend yield
PEG ratio
EV/EBITDA
EV/Sales
Cost/Income ratio
Sector-specific ratios
EV/capacity
EV/output
In this method generally apply in the case of transfer of partially completed products, distribution
of completed goods and where RPM cannot be sufficiently applied. In general RPM more
suitably applied in this case, TNMM is also not right.
In this method:
1. Relatively the net profit margin of a entities take position from a non-arm's length deal
with the net profit margins understand by arm's length associate parties from comparable
transactions; and
2. Observe the net profit margin relation to suitable base such as price, sales or properties.
This vary from the cost plus and resale price methods that balance gross profit margins. though,
the TNMM need a stage of similarity to that necessary for the request of the cost plus and resale
price methods. Where the applicable information exists at the gross margin stage, associate
enterprises should apply the cost plus or resale price method.
Difination
In this method, the total price of intangible incurred by the tested parties in transferring products
and services to Associated Enterprises is measured and the sum of gross profit spot used by
similar enterprises in comparable transactions with self-determining associated enterprises is
determined. The sum of gross spot arrived at is used to take into account functional and other
variation to determine ALP. The extra similarities in the functions, risks and property, the extra
likely it is that the cost plus method will create an suitable estimation of an arm's length result.
this method is generally used where semi finished products are transferred.
In common, for reason of apply a cost-based method, costs are divided into three categories:
The cost plus method uses limits calculated after direct and indirect costs of goods. Correctly
shaping cost under the cost plus method is important. Cost is typically calculated in agreement
with accounting values that are usually accepted for that exacting industry in the region where
the products are produced.
The cost base of the deal of the associated parties to which a mark-up is to be applied be
calculated in the same way and returns comparable functions, risks, and properties as the cost
base of the similar transactions. Where cost is not exactly resolute in the same way, both the
mark-up and the transfer will be used.
This method is used when associate enterprise transactions are included that it becomes very
hard to conduct a transfer pricing analysis on a transactional base. The priority function to do is
combined net profit acquiring to connected entities from a transaction is decide. After that
combined net profit is allotted in between connected entities with mention to market income
gained by free enterprises in comparable transactions.
In this Profit Split Method (PSM):
1. First move is to decide the sum of profit gained by the associate parties from a controlled
transaction. The Profit Split Method (PSM) allots the total incorporated profits connected
to a controlled transaction, not the total profits of the associate group as a complete. The
profit to be split is usually the operating profit, before the reduce of interest and taxes. In
some satiations, it may be suitable to split the gross profit.
2. Second move is to split the profit among the associate parties base on the comparative
price of their assistance to the non-arm's length dealings, allowing for the functions
assumed, the properties used, and the risks understood by each non-arm's length associate
parties, in connection to what arm's length parties would have taken.
1. The functioning of two or more non-arm's length associate parties are extremely
included, making it hard to assess their dealings on an entity basis; and
2. 4. The continuation of valuable and sole intangibles makes it hard to set up the proper
stage of comparability with uncontrolled dealings to relate a one-sided method.
Due to the difficulty of international operations, one group of the global group is rarely allowed
to the total return attributable to the important properties, such as intangibles.