Transfer Pricing and Cross-Border Value Chains

Introduction and context

Transfer pricing concerns the prices and other conditions applied in transactions between associated enterprises. In a multinational enterprise (MNE), one legal entity may manufacture components, another may own technology, a third may provide financing, and a fourth may distribute finished products. The allocation of income among these entities affects corporate tax liabilities in different jurisdictions. Transfer pricing therefore sits at the intersection of taxation, financial reporting, commercial strategy, customs, company law, and international dispute resolution.

The central international standard is the arm’s-length principle: the conditions of a controlled transaction should be consistent with those that would have been agreed between independent enterprises in comparable circumstances. The principle does not require every group company to earn the same margin. It requires the allocation of profit to reflect economically significant activities, assets used, and risks assumed.

This chapter applies the principle to tangible goods, intra-group services, financing, and intangible assets. It also explains functional and comparability analysis, recognised pricing methods, documentation, advance pricing agreements (APAs), mutual agreement procedures (MAPs), and the governance of cross-border value chains.

Learning objectives

By the end of this chapter, the reader should be able to:

1. Explain the purpose and scope of the arm’s-length principle.
2. Map a cross-border value chain and distinguish legal ownership from economic contribution.
3. Perform a functional, asset, and risk analysis.
4. Select and apply an appropriate transfer-pricing method.
5. Evaluate comparability and make defensible adjustments.
6. Prepare and critically review transfer-pricing documentation.
7. Explain dispute-prevention and dispute-resolution mechanisms.
8. Identify governance, ethical, technological, and regulatory risks.

1. The architecture of international transfer pricing

1.1 Controlled and uncontrolled transactions

A controlled transaction is a transaction between associated enterprises, such as a parent and subsidiary or two subsidiaries under common control. An uncontrolled transaction is between independent parties. Transfer pricing analysis compares the former with the latter, directly or through an appropriate profitability indicator.

Association may arise through ownership, voting rights, management control, common economic control, or other legal tests established by domestic legislation and tax treaties. The precise threshold differs across jurisdictions. A company must therefore begin with the relevant domestic law, treaty provisions, and administrative guidance rather than assuming that a group relationship is defined identically everywhere.

1.2 Arm’s-length principle and value creation

The arm’s-length principle is implemented through a transaction-based analysis. The analyst should not begin with a desired tax result and then select a method. The correct sequence is:

1. accurately delineate the actual transaction;
2. identify the economically relevant characteristics;
3. analyse functions performed, assets used, and risks assumed;
4. identify potential internal or external comparables;
5. select the most appropriate method;
6. determine an arm’s-length price or range; and
7. document the reasoning and monitor changes.

Modern international guidance, particularly the OECD Transfer Pricing Guidelines and the OECD/G20 Base Erosion and Profit Shifting (BEPS) materials, places substantial emphasis on the conduct of the parties and on the capacity to control economically significant risks. Contractual language remains important, but a contract cannot simply allocate risk to an entity that neither controls the risk nor has the financial capacity to bear it.

1.3 Value-chain mapping

A value chain identifies how goods, services, data, capital, and intangible assets move across entities and jurisdictions. It should show both physical and legal flows. A product may be manufactured in one country, legally purchased by a regional principal in another, marketed through local distributors, and sold to customers worldwide. The entity receiving the largest accounting profit may not necessarily perform the most important functions; conversely, legal ownership may be economically significant where it is accompanied by development, enhancement, maintenance, protection, and exploitation activities.

Figure: A value-chain map links legal entities to functions, assets, risks, and pricing questions.

2. Functional and comparability analysis

2.1 The FAR framework

The FAR analysis examines:

• Functions: manufacturing, procurement, research, logistics, marketing, quality control, financing, management, and customer support.
• Assets: tangible assets, working capital, specialised equipment, data, contractual rights, and intangibles.
• Risks: market, inventory, product liability, credit, foreign-exchange, capacity, research failure, and regulatory risks.

Risk analysis requires more than listing risks in a contract. The analyst should determine who makes decisions to take or respond to the risk, who has the capability to do so, and who has the financial capacity to bear the consequences. A party performing routine activities under detailed instructions may not be the party controlling the most significant entrepreneurial risks.

2.2 Accurate delineation of the transaction

The actual transaction may differ from its invoice description. For example, a payment labelled “management fee” may contain technical support, shareholder activity, financing, or a royalty. The analysis should examine written agreements, actual conduct, emails, decision rights, personnel, budgets, board papers, and accounting records.

Important economically relevant characteristics include:

2.3 Comparability

A comparable need not be identical, but differences must not materially affect the price or profit indicator, or they must be capable of reliable adjustment. Comparability is evaluated by examining the same five characteristics above. Internal comparables—transactions between one group entity and an independent customer or supplier—are often more reliable because product, market, and accounting information may be more accessible. External comparables may be necessary where no internal transaction exists.

A comparability adjustment attempts to isolate a material difference. For example, a working-capital adjustment may be relevant when one distributor gives customers long credit periods while another does not. Adjustments should be economically justified, consistently calculated, and supported by reliable data. An adjustment that merely improves the apparent result is not evidence of comparability.

3. Recognised transfer-pricing methods

The five traditional OECD-recognised methods are the comparable uncontrolled price, resale price, cost plus, transactional net margin, and transactional profit split methods. The “most appropriate method” depends on the facts, the quality of available data, and the reliability of adjustments.

3.1 Comparable uncontrolled price method

The CUP method compares the price charged in a controlled transaction with the price charged in a comparable uncontrolled transaction. It is particularly powerful where the product, contractual terms, market, volume, and timing are closely comparable—for example, a commodity traded in a transparent market.

The method is highly sensitive to differences in quality, volume, freight, insurance, delivery point, currency, and contractual rights. A CUP may therefore be theoretically direct but practically less reliable than a net-margin method when detailed price information is unavailable.

3.2 Resale price method

The resale price method begins with the price at which a product purchased from an associated enterprise is resold to an independent customer. An appropriate gross resale margin is deducted for the reseller’s functions and risks:

The formula assumes that the resale price and gross margin are measured on a consistent basis and that the reseller does not perform substantial manufacturing or unique marketing functions. If the independent resale price is 1,000 and the appropriate gross margin is 20%, the transfer price is 800. The method is more useful for relatively routine distributors than for entities adding significant value.

3.3 Cost plus method

The cost plus method starts with the supplier’s relevant cost base and adds an arm’s-length mark-up:

If relevant costs are 600 and the mark-up is 10%, the transfer price is 660. The cost base must be defined carefully. Pass-through costs may require different treatment from value-adding costs, and accounting classifications must be comparable between tested and comparable enterprises. The method is frequently used for contract manufacturing, routine procurement, and certain support services.

3.4 Transactional net margin method

The TNMM compares a net profit indicator earned in a controlled transaction with the indicator earned by comparable independent enterprises. Common indicators include operating margin, return on sales, return on operating costs, and return on operating assets.

The numerator and denominator must be conceptually consistent. Operating profit should ordinarily be matched with an operating base, and exceptional or non-operating items should be reviewed. TNMM is often less sensitive than a gross-margin method to product differences, but it can conceal important functional differences and may be affected by accounting policies, market conditions, and the selection of the tested party.

If a tested distributor has sales of 10,000, operating costs of 9,200, and an arm’s-length operating margin of 5% of sales, its target operating profit is 500. Its allowable total operating costs are 9,200, so the implied purchase cost is:

If costs excluding purchases are 9,200, the transfer price is 300. The resulting operating profit is 500, or 5% of sales. This calculation assumes that all stated costs are operating costs, that no other operating income exists, and that the tested transaction is the relevant balancing item.

3.5 Transactional profit split method

The profit split method is appropriate where transactions are highly integrated, the parties make unique and valuable contributions, or reliable comparable transactions cannot be identified. The combined relevant profit is determined and allocated using an economically justifiable basis, often through a contribution analysis or a residual analysis.

A simplified residual approach may be expressed as:

The residual is then allocated according to the relative contributions of the parties, using evidence such as development expenditure, personnel, decision-making, assets, and risk control. There is no universally correct allocation key. A key must reflect value creation and avoid mechanically equating expenditure with value.

3.6 Method selection

Method selection is not a choice between “low tax” and “high tax.” A defensible method is the one that best captures the economically relevant features with the fewest unreliable assumptions. The analyst should record rejected methods and explain why they were less reliable. In practice, a range of results may be more realistic than a single point. Domestic rules may prescribe how a range is used, including whether a median or interquartile range is relevant.

4. Application to major transaction categories

4.1 Tangible goods

For tangible goods, the analysis should consider product specifications, brand, volume, geographic market, delivery terms, warranties, inventory ownership, currency, and credit terms. Commodity transactions may support a CUP, especially where quoted prices exist. Contract manufacturing may support a cost-plus or TNMM approach if the manufacturer performs routine production and does not own valuable process intangibles.

Inventory risk must be analysed carefully. An entity bearing obsolete-stock risk generally requires a different remuneration from one producing under firm orders and receiving protection from price fluctuations. Incoterms clarify delivery obligations but do not, by themselves, determine tax ownership of risk or profit.

4.2 Intra-group services

An intra-group service should normally provide a benefit to the recipient: an independent enterprise would reasonably be willing to pay for it or perform it itself. Evidence may include service agreements, work products, personnel time, tickets, reports, or measurable outcomes. Activities performed solely in the shareholder’s capacity—such as parent-company investor relations or consolidated reporting—are generally not chargeable as services to subsidiaries.

The cost base and allocation key should reflect expected benefit. Examples include headcount for routine human-resources support, transaction volume for payment processing, or computing capacity for information-technology infrastructure. An allocation based solely on revenue may be inappropriate where revenue is not a driver of service consumption.

A low-value-adding service may be charged under a simplified approach in jurisdictions that recognise such an approach, often using a standard mark-up. The taxpayer must still demonstrate that the services qualify, that shareholder activities are excluded, and that costs are accurately identified. Simplification is not a substitute for evidence.

4.3 Financing

Intra-group loans require analysis of the borrower’s creditworthiness, amount, maturity, currency, security, seniority, covenants, purpose, and market conditions. A lender’s price should reflect the risk of the actual instrument, not merely the group’s overall credit rating. Implicit group support may affect the borrower’s standalone rating, but explicit guarantees, cash pooling, and central treasury functions require separate analysis.

A basic interest calculation is:

If principal is 5,000, the annual rate is 6%, and the period is one year, interest is 300 monetary units. This arithmetic does not establish that 6% is arm’s length; the rate must be supported by comparable debt instruments or an appropriate credit analysis. For a short period, the time fraction must be measured consistently, for example days divided by 365, subject to the contractual convention.

Cash pooling requires analysis of whether the pool leader is a routine coordinator or a substantive financial institution performing liquidity, credit, and risk-management functions. Guarantees may produce a benefit to the borrower and a fee to the guarantor, but the fee must be proportionate to the incremental benefit and the guarantor’s functions.

4.4 Intangible assets

Intangibles include patents, trademarks, copyrights, software, designs, trade secrets, contractual rights, customer relationships, and data-related rights. Legal title is not conclusive evidence that all returns belong to the legal owner. The analysis considers who performs and controls development, enhancement, maintenance, protection, and exploitation activities—the commonly used DEMPE framework.

A royalty rate may be analysed using comparable licence agreements, profit-based methods, or valuation techniques. A discounted cash-flow valuation may be relevant where future cash flows are identifiable:

Here, CF_t is the expected cash flow in period t, r is the discount rate, and n is the number of periods. The formula assumes cash flows are measured consistently, the discount rate reflects relevant risk, and the timing convention is defined. Forecast uncertainty, useful life, tax effects, terminal value, and probability weighting can materially affect the result. Valuation is therefore a model, not an objective fact.

A royalty based on sales may be unsuitable where the licensee’s sales are driven mainly by its own marketing or distribution assets. Conversely, a profit split may be more appropriate where both parties contribute unique and valuable intangibles.

5. Documentation and compliance

The OECD three-tier documentation framework comprises the master file, local file, and Country-by-Country (CbC) report, subject to domestic implementation and thresholds.

Documentation should be prepared contemporaneously where required. It should reconcile to financial statements and tax returns, explain assumptions, identify data limitations, and be updated when functions, markets, financing, or ownership change. A robust process includes a transaction inventory, materiality thresholds, ownership review, legal-agreement review, comparable search, financial reconciliation, management sign-off, and retention controls.

Documentation does not guarantee acceptance. It demonstrates a reasoned process and permits the tax authority to understand the taxpayer’s position. Incomplete or inconsistent documentation can increase penalties, audit duration, and the risk of double taxation.

6. Dispute prevention and resolution

6.1 Advance pricing agreements

An APA is an agreement that determines, before or during a specified period, the transfer-pricing methodology and critical assumptions for covered transactions. It may be unilateral, bilateral, or multilateral. Bilateral and multilateral APAs generally provide stronger protection against double taxation because the relevant tax administrations participate.

Critical assumptions may include product markets, exchange rates, business structure, accounting treatment, and the absence of major reorganisations. If assumptions fail, the APA may require revision, cancellation, or a compensating adjustment. APAs improve certainty but require time, disclosure, administrative resources, and continuing compliance.

6.2 Mutual agreement procedure

A taxpayer facing taxation inconsistent with a treaty may request a MAP from the competent authority. The authorities may consult to eliminate double taxation, including through a corresponding adjustment. MAP is not simply an appeal against a domestic assessment; it is a treaty-based process whose availability and deadlines must be checked carefully. Some treaties provide arbitration if the authorities cannot resolve the case within a specified period.

6.3 Audit readiness

An audit-ready file should contain agreements, invoices, transaction data, organisation charts, interviews with operational personnel, budgets, board decisions, risk-control evidence, comparable searches, calculations, and reconciliations. Tax and finance teams should distinguish facts from assumptions and should preserve the evidence available when the transaction occurred, not only evidence assembled after an audit begins.

7. Illustrative integrated case

The following is a fictional illustrative case. Nova Devices Group develops smart sensors in Country A, manufactures them in Country B, owns a regional distribution company in Country C, and sells through subsidiaries in Countries D and E. The Country B manufacturer has dedicated equipment and performs quality control but receives detailed production instructions. The Country C principal owns regional customer contracts, decides market strategy, and funds inventory. Country D performs routine distribution; Country E develops valuable local marketing campaigns.

Problem

The group has historically charged Country D a price that leaves it with a 2% operating margin. Country D claims that it performs important customer-support activities and should earn more. Country E receives a royalty for using the group trademark, although its marketing expenditure is substantially higher than that of other distributors. The tax authority in Country B argues that the manufacturer bears significant product and capacity risks and should earn more than a routine return.

Analysis

The group first delineates the transactions rather than relying on labels. Interviews and records show that Country B cannot set production volumes independently, does not control product-design risk, and is compensated even when Country C changes forecasts. It performs important manufacturing functions but appears not to control the principal market and product risks. A cost-plus or TNMM analysis may therefore be appropriate, with careful treatment of dedicated assets and quality functions.

Country D has limited inventory and credit risk, follows regional pricing policies, and performs routine customer support. A TNMM with Country D as tested party may be defensible, but the 2% result must be tested against reliable distributors and adjusted for accounting differences. Country E is different: its campaigns create local market value and may contribute to brand enhancement. A simple royalty deduction could double-count the value of its own marketing. The group should analyse the marketing intangibles, contractual rights, and contributions of both parties; a higher distributor return, a reduced royalty, or a profit split may be more appropriate than a standard rate.

Country C performs treasury and strategic functions and controls inventory decisions. Its residual return cannot be justified merely by holding legal title. Evidence of decision-making, personnel, capital, and risk capacity is required.

Approach and outcome

Nova prepares a value-chain map, revises intercompany agreements to reflect actual conduct, and performs a segmented financial analysis. Country B receives a tested cost-plus return, subject to monitoring of capacity and warranty risk. Country D’s return is benchmarked using comparable routine distributors. Country E’s marketing contribution is separately evaluated, and the royalty is renegotiated with a critical-assumption clause. The group enters preliminary bilateral APA discussions for the largest flows and establishes a quarterly transfer-pricing dashboard.

The outcome is not a predetermined reduction in tax. Rather, it is a more coherent allocation of profit, improved evidence, and a lower risk of inconsistent adjustments. The case demonstrates that transfer pricing is an operating-governance process, not merely a year-end invoice adjustment.

8. Governance, ethics, technology, and contemporary developments

Transfer pricing has legitimate commercial functions, including pricing accountability, performance measurement, customs planning, and investment evaluation. It becomes ethically problematic when documentation is fabricated, risks are contractually shifted without operational substance, or profits are allocated to entities lacking people, decision rights, or financial capacity. Professional accountants must apply integrity, objectivity, professional competence, confidentiality, and due care.

Governance should assign responsibility across tax, finance, legal, treasury, supply-chain, information-technology, and operational teams. Boards should understand material transfer-pricing risks, uncertain tax positions, restructuring proposals, and potential double taxation. Policies should address approval of new intercompany transactions, changes in business models, and escalation of audit disputes.

Technology can improve transaction inventories, automated invoice testing, data lineage, margin monitoring, and reconciliation. Machine-learning tools may identify anomalies or predict which transactions resemble historical comparables. However, AI-generated comparables or risk classifications require human validation. Data may embed selection bias, inconsistent accounting classifications, or confidential information risks. Explainability, access controls, model governance, and audit trails are essential.

Contemporary developments include increased scrutiny of substance, hard-to-value intangibles, financial transactions, centralised procurement, digital business models, and the interaction between transfer pricing and global minimum-tax rules. Transfer pricing remains relevant under a global minimum-tax regime, but a low effective tax rate does not make an arm’s-length analysis unnecessary. Domestic legislation, treaty interpretation, customs valuation, withholding taxes, indirect taxes, and accounting rules may produce different outcomes and must be coordinated.

9. Challenges and limitations

First, reliable comparables are often scarce. Public databases may provide financial ratios without sufficient information about functions, accounting policies, or risk. Second, profit-based methods can be sensitive to the tested party, cost classification, business-cycle effects, and loss-making years. Third, intangible valuation depends on uncertain forecasts and assumptions. Fourth, different jurisdictions may apply different methods, ranges, deadlines, and penalty rules.

Fifth, legal agreements and actual conduct may diverge. Sixth, global supply chains can change quickly because of geopolitical events, pandemics, tariffs, sanctions, or technology shifts. Finally, an arm’s-length framework may struggle where integrated enterprises create value collectively and no independent transaction closely resembles the arrangement. These limitations do not eliminate the principle; they require transparent assumptions, sensitivity analysis, corroboration, and professional judgement.

Best-practice decision framework

A practical professional workflow is:

1. Identify all associated enterprises and controlled transactions.
2. Map legal, physical, financial, data, and intangible flows.
3. Interview decision-makers and inspect evidence of risk control.
4. Accurately delineate each transaction.
5. Perform FAR and comparability analyses.
6. Screen internal comparables before external databases.
7. Select and test the most appropriate method.
8. Reconcile results to segmented accounts and tax returns.
9. Document assumptions, rejected methods, adjustments, and uncertainties.
10. Monitor quarterly and reassess after restructurings or market shocks.
11. Consider an APA or MAP strategy for material recurring risks.
12. Review tax, customs, withholding, VAT/GST, accounting, and minimum-tax interactions.

Chapter Summary

Transfer pricing allocates income among associated enterprises by applying the arm’s-length principle to accurately delineated controlled transactions. A reliable analysis begins with value-chain mapping and a FAR assessment of functions, assets, and risks. Contractual terms must be tested against actual conduct and the parties’ capacity to control economically significant risks.

The CUP, resale price, cost plus, TNMM, and profit split methods each have suitable contexts and limitations. Method selection depends on the quality of comparables and the reliability of adjustments, not on the desired tax result. Tangible goods require attention to product and market differences; services require a benefit test and defensible allocation keys; financing requires credit and instrument analysis; and intangible returns require attention to DEMPE activities and valuation uncertainty.

Master files, local files, and CbC reports support transparency but do not replace substantive analysis. APAs and MAPs can prevent or resolve disputes, while governance, contemporaneous evidence, technology controls, and ethical judgement support sustainable compliance. The most effective transfer-pricing system integrates tax analysis with commercial operations and continuously monitors changes in the cross-border value chain.

Key Terms

Arm’s-length principle: Standard requiring controlled transactions to reflect conditions between independent enterprises.

Associated enterprises: Entities connected through ownership, control, or other legally defined relationships.

Controlled transaction: Transaction between associated enterprises.

Uncontrolled transaction: Transaction between independent parties.

FAR analysis: Examination of functions performed, assets used, and risks assumed.

Accurate delineation: Identification of the actual economically relevant transaction.

Comparability: Degree to which controlled and uncontrolled transactions can be reliably compared.

CUP method: Method comparing prices in controlled and uncontrolled transactions.

Resale price method: Method starting with an independent resale price and deducting an arm’s-length gross margin.

Cost plus method: Method adding an arm’s-length mark-up to a relevant cost base.

TNMM: Method comparing a controlled party’s net profitability with that of comparable independent enterprises.

Profit split method: Method allocating combined relevant profit according to relative contributions.

Tested party: Party whose financial indicator is benchmarked under a one-sided method.

DEMPE: Development, enhancement, maintenance, protection, and exploitation of intangibles.

Master file: Documentation describing the MNE group’s global operations and transfer-pricing policies.

Local file: Documentation describing local controlled transactions and their analysis.

CbC report: Jurisdiction-by-jurisdiction report of specified financial and activity information.

APA: Advance pricing agreement establishing a transfer-pricing methodology for future periods.

MAP: Mutual agreement procedure under which treaty authorities address international tax disputes.

Comparability adjustment: Adjustment intended to remove a material difference between transactions or enterprises.

Review Questions

Short Answer Questions

1. What is the arm’s-length principle?
2. What are the three components of a FAR analysis?
3. Why may legal ownership of an intangible be insufficient to justify all residual returns?
4. State one condition under which the CUP method may be especially reliable.
5. What are the three tiers of OECD transfer-pricing documentation?

Long Answer Questions

1. Explain the process of accurately delineating a controlled transaction and relate it to contractual terms and actual conduct.
2. Compare the cost plus method and TNMM, including their principal strengths and limitations.
3. Discuss the transfer-pricing issues arising in intra-group financing and cash pooling.
4. Explain how DEMPE analysis affects the allocation of intangible-related returns.
5. Evaluate the roles of APAs and MAPs in preventing and resolving double taxation.

Analytical / Application Questions

1. A routine distributor has sales of 20,000, operating costs excluding purchases of 18,000, and a target operating margin of 4% of sales. Calculate the implied purchase price and explain the assumptions behind the calculation.
2. An MNE claims that a subsidiary bears major market risk because its contract says so. Interviews show that the parent sets prices, approves inventory, and funds losses. Analyse which entity may control the risk and identify evidence needed.
3. Two jurisdictions propose different transfer prices for a valuable software licence. Design a dispute-prevention strategy involving comparability analysis, valuation evidence, documentation, and possible bilateral mechanisms.

Multiple Choice Questions with Answers

Question 1

Which sequence best reflects a defensible transfer-pricing analysis?

A. Choose a tax result, select a method, and obtain supporting data

B. Delineate the transaction, perform FAR analysis, assess comparables, and select the method

C. Select the entity with the lowest tax rate and allocate all residual profit to it

D. Use the same mark-up for every group transaction

Correct Answer: B. Delineate the transaction, perform FAR analysis, assess comparables, and select the method

Question 2

Under the cost plus method, relevant costs are 800 and the arm’s-length mark-up is 15%. What is the transfer price?

A. 815

B. 920

C. 935

D. 1,200

Correct Answer: B. 920

Question 3

Which method begins with the price at which goods are resold to an independent customer?

A. Comparable uncontrolled price method

B. Cost plus method

C. Resale price method

D. Profit split method

Correct Answer: C. Resale price method

Question 4

A company has sales of 10,000 and an arm’s-length operating margin of 6% of sales. What is its target operating profit?

A. 60

B. 600

C. 940

D. 1,060

Correct Answer: B. 600

Question 5

Which item is generally most relevant to determining whether an intra-group service is chargeable?

A. Whether the parent prefers to recover its shareholder costs

B. Whether the recipient obtains a benefit for which an independent enterprise might pay

C. Whether the service invoice uses a round number

D. Whether the service provider is located in a high-tax country

Correct Answer: B. Whether the recipient obtains a benefit for which an independent enterprise might pay

Question 6

In analysing an intra-group loan, which factor is least relevant?

A. Currency and maturity

B. Borrower creditworthiness

C. Security and seniority

D. The colour of the lender’s corporate logo

Correct Answer: D. The colour of the lender’s corporate logo

Question 7

What does DEMPE analysis primarily examine?

A. Development, enhancement, maintenance, protection, and exploitation of intangibles

B. Debt, equity, market price, and earnings

C. Distribution, employment, management, payroll, and expenses

D. Data, exchange rates, margins, pricing, and expenses

Correct Answer: A. Development, enhancement, maintenance, protection, and exploitation of intangibles

Question 8

Which document primarily provides local transaction-level transfer-pricing analysis?

A. Master file

B. Local file

C. Country-by-Country report

D. Annual report to customers

Correct Answer: B. Local file

Question 9

Which mechanism is designed to establish transfer-pricing methodology in advance?

A. Mutual agreement procedure

B. Advance pricing agreement

C. Customs inspection

D. Financial statement audit

Correct Answer: B. Advance pricing agreement

Question 10

A tested distributor has sales of 20,000, operating costs excluding purchases of 18,000, and a target operating margin of 4% of sales. What is the implied purchase price?

A. 800

B. 1,200

C. 1,800

D. 2,000

Correct Answer: B. 1,200