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Choosing The Right Methodology

The days of plainly working on a "cost plus" basis, with an arbitrary overhead figure without taking into account all the required aspects and factors are long gone. Today, both international and local legislation dictate that the corporation has to choose the transfer pricing methodology which best suits its operations, pending the exact nature of the tested transaction, and subject to the applicable rules (which may differ).

When regulating transfer pricing, several different methodologies may be used. The tax payer should choose the applicable methodology with extra care, as different methodologies may lead to different legal and economic outcomes. For example, certain tax authorities may perceive a "cost plus" methodology as relevant only for a specific kind of transaction, while the "profit split" method should be applied to other kinds of transactions. Choosing the wrong kind of methodology may send a message to the tax authorities that the true nature of the intercompany transaction differs from the one stated by the company. In several countries, this may further result in determining that the company is a "Permanent Establishment".

For more information about the different methodologies, please refer to this page on our (Hebrew) transfer pricing website.