B4.136 Arm's length pricing—transaction profit methods
Once a comparability analysis has been performed which determines the conditions and economically relevant factors of the controlled transaction (see B4.131), these conditions and factors can then be compared with those of comparable transactions of independent enterprises in order to determine an arm's length price. There are various ways to do this depending on the transaction type.
The OECD Guidelines1 express a clear preference for the traditional transaction methods of setting an arm's length price (ie the comparable uncontrolled price method (CUP) , the resale price method (RPM) and the cost-plus method) where they produce the most reliable result. In addition where the CUP method and another transfer pricing method can be applied in an equally reliable manner, the CUP method is favoured. However, the guidelines recognise that the complexities of business may render the traditional methods inapplicable, in which case transactional profit methods (ie the transactional profit split method or the transactional net margin method) may be used to establish a transfer price, as long as they provide the most appropriate basis for applying the arm's length principle2.
The arm's length principle does not require the application of more than one method for a given transaction. While in some cases the selection of a method may not be straightforward and more than one method may be initially considered, generally it will be possible to select one method that is apt to provide the best estimation of an arm's length price (be that a traditional transaction