Transfer Pricing Methods - Tangible & Intangible

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The United States Internal Revenue Code Section 482 provides specified methodologies for determining the arm’s length terms for the transfer of tangible property, and capital between tax—payers. The taxpayer is required to use the method that provides the most reliable measure of arm’s length pricing. Although there is no automatic best method for each taxpayer, the regulations indicate under which circumstances each of the methods is likely to be most reliable for finding the appropriate transfer price.

Section 482 provides five transfer pricing methods for tangible property and three for intangible property.

Tangible Property - 5 Transfer Pricing Methods:

Tangible property methods include the following:

1. The comparable uncontrolled price method
2. The resale price method
3. The cost plus method
4. The comparable profits method
5. The profit split method

The three specified methods for the transfer of intangible property include the following:

1. the comparable uncontrolled transaction method
2. the cost plus method
3. the profit split method.

Under the comparable uncontrolled transaction method, an evaluation is made to determine if the amount charged for a controllable transfer of intangible property was arm's length as compared to a comparable uncontrolled transactions must involve either the same intangible property or comparable intangible property.

To be comparable, the two intangibles must be used in connection with similar products or processes within the same general industry or market, and have similar profit potential.

For the Cost Plus Method and Profit Split Method, the same definitions are used as for the transfer of tangible property, described above.