The transactional net margin method (TNMM) in transfer pricing compares the net profit margin of a taxpayer arising from a non-arm's length transaction with the net profit margins realized by arm's length parties from similar transactions; and examines the net profit margin relative to an appropriate base such as costs, sales or assets.
This differs from the cost-plus and resale price methods that compare gross profit margins. However, the TNMM requires a level of comparability similar to that required for the application of the cost plus and resale price methods. Where the relevant information exists at the gross margin level, taxpayers should apply the cost plus or resale price method.
Because the TNMM is a one-sided method, it is usually applied to the least complex party that does not contribute to valuable or unique intangible assets. Since TNMM measures the relationship between net profit and an appropriate base such as sales, costs, or assets employed, it is important to choose the appropriate base taking into account the nature of the business activity. The appropriate base that profits should be measured against will depend on the facts and circumstances of each case.
Famous quotes containing the words net, margin and/or method:
“You have been trapped in the inescapable net of ruin by your own want of sense.”
—Aeschylus (525–456 B.C.)
“Then he rang the bell and ordered a ham sandwich. When the maid placed the plate on the table, he deliberately looked away but as soon as the door had shut, he grabbed the sandwich with both hands, immediately soiled his fingers and chin with the hanging margin of fat and, grunting greedily, began to much.”
—Vladimir Nabokov (1899–1977)
“There is assuredly no more effectual method of clearing up one’s own mind on any subject than by talking it over, so to speak, with men of real power and grasp, who have considered it from a totally different point of view.”
—Thomas Henry Huxley (1825–95)