This article introduces a flow chart outlining the priority in which different TP Methodologies should be applied.
Three basic methods
As shown in the flow chart, when determining which TP Methodology to apply a taxpayer should first address whether or not the relevant transaction is an inventory transaction.
For inventory transactions preference is given to the three basic transactional TP Methodologies – Comparable Controlled Price, Resale Price or Cost Plus Methodologies. When one of these three methods cannot be applied then either a method corresponding to them, a profit split or transactional net margin (‘TNMM’) TP Methodology can be applied.
For non inventory transactions – for example, service transactions, financial transactions, transactions in intangible assets – taxpayers should, where possible, use a method equal to one of the above three basic methods.
Where application of one of the three basic methods is not possible, the profit split method or a method equal to the TNMM method can be applied. Finally when no other approach is possible a method corresponding to the TNMM can be applied.
In practice this prioritisation would seem to limit the circumstances under which a TNMM methodology can be applied to non-inventory transactions, such as those involving intangible assets.