When products are highly unique, integrated, or involve valuable intangible assets, traditional transaction methods often fail because direct comparables cannot be found. In these scenarios, transactional profit methods are applied.
Transactional Net Margin Method (TNMM)
The TNMM examines the net profit margin relative to an appropriate base (such as costs, sales, or assets) that an enterprise realizes from a controlled transaction. This net margin is compared to the net profit margin earned by independent enterprises in similar transactions.
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| TNMM Profit Level Indicators (PLIs) |
+-------------------+-------------------+
|
+------------------------+------------------------+
| |
+----------v----------+ +----------v----------+
| Net Cost Plus | | Operating Margin |
+----------+----------+ +----------+----------+
| |
(Net Profit / Total Costs) (Net Profit / Sales)
Used for service/contract providers Used for local sales/distributors
- Advantage: TNMM is less sensitive to minor product differences than traditional methods, as it analyzes overall net operational profitability.
Profit Split Method (PSM)
The PSM identifies the combined profits resulting from a specific controlled transaction and splits those profits between the associated enterprises based on an economically valid basis that approximates the division of profits that would have been agreed upon at arm’s length.
- Application: This method is mandatory when both related parties contribute unique, highly valuable intangibles (e.g., two subsidiaries co-developing a piece of advanced software) or when the operations are so deeply integrated that they cannot be evaluated separately.
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