When traditional transaction methods cannot be applied then transactional profit methods may be used. These are methods that examine the profits that arise from particular transactions among associated enterprises. Codes 4 and 5 are transactional profit methods that satisfy the arm's length principle.
Code 4 - profit split method
This method determines the appropriate pricing for transactions by:
- identifying the combined profit or loss from the dealings between the related parties
- splitting that combined profit or loss between the related parties.
The split of profit or loss between the parties must be made on an economically valid basis that approximates the division of profits in an agreement made at arm's length.
Code 5 - transactional net margin method
This pricing method is based on comparisons made at the net profit level between the taxpayer and independent parties in relation to a comparable transaction or dealing.
It examines the net profit margin relative to an appropriate base (for example, costs, sales or assets) that a taxpayer realises from a controlled transaction.
Comparisons at the net profit level can be made on a single transaction or in relation to some aggregation of dealings between associated enterprises.