3.6 Transactional Net Margin Method (TNMM)

The TNMM is similar to the cost plus and resale price methods in the sense that it uses the margin approach. This method is useful in instances where it is difficult to compare at gross profit margin such as in situations where different accounting treatments are adopted. The method examines the net profit margin relative to an appropriate base such as costs, sales or assets attained by a MNE from a controlled transaction. As with the cost plus or resale price methods, this margin should preferably be derived from comparable uncontrolled transactions between the same taxpayer and independent parties. If there are no comparable uncontrolled transactions involving that MNE, reference may be made to the net profit margin that would have been earned in comparable transactions by an independent person. Functional analysis of the associated person as well as the independent person will have to be applied to determine comparability.

3.6.1 Application of TNMM

  1. Net margins (unlike gross margins or prices) tend to be significantly influenced by various factors other than products and functions (e.g. competitive position, varying cost structures, differences in cost of capital, etc). Therefore, where possible, the usage of TNMM should be confined to cases where these factors have a high degree of similarity, so as to eliminate the effects of these other conditions.