In the TNMM you look at operating margins for both the distributer and the manufacturer: how do you calculate this for both these parties?
Manufacturer: Net profit/full cost
Distributer: Net profit/external sales
100
What do you look at the return on in the TNMM?
Return on full costs (CoGS + SG&A)
100
What does the Profit split not rely on that the other four methods do?
Data from independent parties
100
There are two types of analysis in the Profit split, what are they?
Contribution and Residual
Normative and descriptive
100
What are examples of characteristics of a product or service?
Type, quality, quantity
Facts about the product
Availability and volume of supply
The nature and extent of a service
200
What does the use of the TNMM require?
Net margin availability from independent comparable transactions
200
What is the net margin also called?
Net margin = operating margin = EBIT margin
200
When does the Profit split typically occur?
During highly integrated functions and in cases where no market data is available for use of a more direct method
200
What does it mean to be comparable?
That none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology or that reasonably accurate adjustments can be made to eliminate the effect of any such differences
200
The functional analysis can be divided into three parts, what are those?
Functions performed
Risk assumed
Assets used
300
When is the TNMM typically used?
When market prices and gross margin data for application of the CUP, Resale price and Cost plus methods are not available
300
The TNMM has three bases as the PLI, what are those?
- Cost (net cost plus)
- Sales (return on sales)
- Assets (return on assets)
300
Who is the tested party in the Profit split?
Both group companies
300
What is the application of the arms length principle generally based on?
On a comparison of the conditions in transactions between independent enterprises
300
If you look at the functional analysis in comparison to expected return, what can you say?
The higher risk, assets and functions the higher expected return
400
When is the TNMM typically used?
Used for transfer pricing of goods sold from a group manufacturer to a group company OR from a group company to a group distributer
400
What is the focus in the profit split method?
Net profit and therefore net margin
400
Whn would you apply this method?
When both manufacturer and distributer have intangibles (is almost impossible)
400
What are the five comparability factors?
- Characteristics of the product/service
- Functional analysis
- Contractual terms
- Economic circumstances
- Business strategy
400
With reference to the functional analysis you can look at manufacturing and sales. In manufacturing how many manufacturers are there and what are their names?
Three -
- Toll manufacturer
- Contract manufacturer
- Full fledged entity
500
Who is the tested party in the TNMM?
The simple party which is the party with no intangibles
500
Is the Profit split a one- or two-sided method?
Two-sided
500
What method is the least favourable?
The Profit split
500
By definition a comparison implies examining two terms, what are these?
- The controlled transaction under review
- The uncontrolled transactions that are regarded as potentially comparable
500
In reference to the functional analysis and the manufacturers which of the three has the highest risk and why?
The full fledged entity beacuse it has intangibles (assets) and therefore higher risk