In column A list the four principal methods that you used in establishing or reviewing the appropriate arm's length pricing or consideration in your related-party international dealings that are revenue in nature, and were identified in items 2a to 2d. Related-party dealings of a capital nature are addressed in item 6.
Not all the methods are generally considered to provide an arm's length outcome, but may be arm's length in some cases.
If you did not use any methods, leave item 5 blank. If you used fewer than four, list only those used.
Record the four methods at H to N in descending order of total dollar value, using the appropriate code from the following table:
Pricing method |
Code |
Comparable uncontrolled price (CUP) method |
1 |
Resale price method |
2 |
Cost-plus method |
3 |
Profit split method |
4 |
Transactional net margin method |
5 |
Marginal costing |
6 |
Cost-contribution arrangement |
7 |
Apportionment of costs |
8 |
Apportionment of income |
9 |
Fixed mark-up applied to cost |
10 |
Fixed percentage of resale price |
11 |
Other arm's length methods |
12 |
The above methods are explained in detail in Taxation Ruling TR 97/20 and Taxation Ruling TR 1999/1 - Income tax: international transfer pricing for intra-group services, and it is strongly recommended that taxpayers with related-party dealings read these rulings before completing item 5. The rulings generally accept the principles in the OECD report Transfer pricing guidelines for multinational enterprises and tax administrations - 1995. However, any differences are clearly indicated.
A brief summary of each of the methods in the above table is provided in appendix 4. The list is not intended to be exhaustive, nor will each method be acceptable under all circumstances.
As in item 4, in order to establish appropriate arm's length pricing under a particular method, a sampling of the dealings may be sufficient if carried out according to accepted statistical practice. Note that where total dollar value of related-party dealings is to be calculated, these dealings should not be 'netted off' (other than in the case of certain derivative instruments - see Item 2d Other for further details). That is, do not set off incomings and outgoings against each other to result in a lesser amount. Instead, add the amounts, both income derived and expenses incurred, to obtain the sum total of all such dealings.
Item 5 Column B
In column B at I to O indicate, against each method identified in column A, the total dollar value of related-party dealings to which you applied that method. Express them as a percentage of the sum of all the related-party dealings for which you used methods to establish arm's length pricing.
Indicate this percentage by using the appropriate code from the following table
Percentage of dollar value of related-party dealings that are revenue in nature - items 2a to 2d only
Percentage |
Code |
0% |
1 |
1% to less than 25% |
2 |
25% to less than 50% |
3 |
50% to less than 75% |
4 |
75% to less than 100% |
5 |
100% |
6 |
The amount referred to above as the total dollar value of related-party dealings is, as in the calculation of the value of dealings in column A, the sum total of such dealings, both income derived and expenses incurred. Do not offset these amounts against each other.
The percentage required is an approximate percentage, and an estimate is acceptable provided it is based on objective premises.
A statistical sampling is an acceptable method, provided the method follows accepted statistical practice. Keep any working papers relating to this process.