When it comes to transfer pricing, one size doesn’t fit all. The way you set prices for goods, services, or intellectual property exchanged within your multinational group can have a huge impact. Not just on compliance, but also on profitability and audit risk.
That’s why the OECD recognises five key transfer pricing methods. Each one has its own strengths, limitations, and best-fit scenarios. And sadly, in most cases, they’re not interchangeable. Picking the wrong one can trigger disputes, double taxation, or a messy audit.
Let’s break down the five most commonly used methods and why it matters which one you choose.
This method starts with the costs of producing or providing a product or service, then adds a reasonable markup, just like an independent business would. It’s particularly useful for manufacturers and service providers within a group.
Think of it as the production-side counterpart to the Resale Minus Method (which is more distributor-focused). It’s straightforward, practical, and defensible, especially when you have solid cost data. But while it works well for setting prices, companies often test the results later with the Transactional Net Margin Method (TNMM).
Why it’s not interchangeable: If you try using Cost Plus for a distributor instead of a manufacturer, the results will be misleading. That’s the kind of mismatch that draws questions from regulators and could land you in an audit.
Transactional Net Margin Method (TNMM)
The most widely used transfer pricing method, TNMM tests whether the net profit margin earned in a controlled transaction is in line with what independent companies would make. It’s flexible, practical, and less likely to attract scrutiny when applied correctly.
You’ll often see TNMM applied to contract manufacturers, limited-risk distributors, or service centres, anywhere one party performs routine, low-risk functions.
Why it’s not interchangeable: TNMM shines when data is limited or transactions are complex. But if you’ve got highly reliable direct price comparisons available like in a CUP analysis, relying on TNMM instead could actually weaken your compliance story.
Resale Minus Method (Resale Price Method)
This method begins with the price at which a distributor resells a product to an independent third party. From there, you subtract an appropriate gross margin to arrive at the transfer price.
It’s best for distributors because it naturally builds in performance discipline if costs rise without matching sales growth, profitability suffers. That said, while it’s helpful for setting prices, TNMM often ends up being the go-to for compliance testing since justifying the “minus” percentage can be tricky.
Why it’s not interchangeable: If you try applying Resale Minus to a manufacturer, you’ll miss the mark entirely. This method is designed around distributor economics, not production costs.
Comparable Uncontrolled Price (CUP) Method
The CUP Method is as direct as it gets: compare the price of a controlled transaction with the price charged between independent parties for the same (or very similar) transaction. When a good match exists, CUP offers the most precise measure of arm’s length pricing.
It’s often applied in financial transactions (like intercompany loan) where market data is more available. But true comparability is rare, which limits its use in many industries.
Why it’s not interchangeable: CUP is unbeatable when you have a reliable match. But if you try to force it where no true comparables exist, it can backfire, leaving your pricing hard to defend.
Profit Split Method
The Profit Split Method allocates total profits (or losses) from a transaction between related parties based on the value each contributes. It’s especially relevant when both sides play a significant role and are highly integrated. For example, joint R&D or shared intellectual property.
It’s holistic, fair, and transparent, but not the default choice. It’s best used when traditional one-sided methods like TNMM or Cost Plus don’t capture the full economic reality.
Why it’s not interchangeable: Using PSM for routine, low-risk transactions would unnecessarily complicate things. It’s meant for complex, interdependent operations. Not simple buy-sell dealings.
The bottom line
Each transfer pricing method has a specific role to play. They’re not alternatives. Cost Plus is built for producers, Resale Minus for distributors, TNMM for routine entities, CUP for transactions with clear comparables, and Profit Split for integrated operations.
Choosing the wrong one can lead to double taxation, strained regulator relationships, and higher compliance costs. The right method depends on your business model, the type of transaction, and the quality of data available.
Getting it right takes some careful thought, but it’s worth the effort. With the right method in place, you’ll stay compliant, cut down on audit risks, and keep your profitability steady across borders.
This article was written by Mike van Vuuren, CEO of Coperitas. This article was last updated on November 10, 2025. Do you have any questions about this content? Please contact us at +31 (0)88 221 5825 or send an email to [email protected].
