To apply the arm's length principle, businesses must use various methods to determine the appropriate transfer prices for their transactions. These methods include:
- Comparable Uncontrolled Price (CUP) Method: Compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction. - Resale Price Method: Determines the price by subtracting an appropriate gross margin from the resale price to an independent entity. - Cost Plus Method: Adds an appropriate markup to the costs incurred by the supplier in a controlled transaction. - Transactional Net Margin Method (TNMM): Examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction. - Profit Split Method: Divides the combined profits from the controlled transactions in a manner that reflects the relative value of each party's contribution to the profit.