Code 6 - marginal costing method
Marginal costing applies only the variable production costs to the costs of a product. This method is often used by companies and multinational enterprise groups for internal cost accounting and management control purposes. Its use in setting transfer prices on international dealings between associated enterprises for tax purposes is acceptable only if pricing on the basis of marginal costs represents an arm's length outcome for the transfer of goods or services into the particular market.
Code 7 - cost-contribution arrangement
A cost-contribution arrangement is one where members of a multinational group act in concert for the benefit of each of the participants to:
- produce or provide goods, intangible property or services
- acquire these jointly from a third party
- agree to share the actual costs and risks undertaken.
Each participant bears a fair share of the costs and is entitled to receive a fair share of rewards. The concept is akin to a joint venture or partnership.
To be consistent with the arm's length principle, the contributors must be satisfied that they can obtain an acceptable rate of return within a timeframe that takes into account their financial and business circumstances.
Code 8 - apportionment of costs
This pricing method apportions the costs associated with a controlled transaction among the associated enterprises. An answer must be found to all transfer pricing problems. However, cases may arise where neither comparable dealings nor data are available to apply to traditional, or profit-based, methods. In these instances, application of an indirect method such as apportionment of costs on the basis of a formula may be applicable.
Code 9 - apportionment of income
This pricing method apportions the income associated with a controlled transaction among the associated enterprises.
As with code 8, this method may be appropriate where there are neither comparable dealings nor data to apply the traditional, or profit-based, methods to the pricing problem.
Code 10 - fixed percentage mark-up applied to costs
This method determines the transfer price for a controlled transaction by applying a fixed percentage mark-up to a relevant cost base where the mark-up is not benchmarked against comparable independent dealings. The absence of benchmarking distinguishes this method from the cost-plus method discussed at code 3.
Code 11 - fixed percentage of resale price
This pricing method determines the transfer price for a controlled transaction as a fixed percentage of the resale price, where the fixed percentage chosen is not benchmarked against the gross margins earned in comparable independent dealings.
The absence of benchmarking distinguishes this method from the resale price method, code 2.
Code 12 - other arm's length methods
Use code 12 if your arm's length method is not represented by codes 1 to 11.