Purpose
Recommend the most appropriate transfer pricing method for a specific intercompany transaction using the OECD "most appropriate method" standard — driven by the functional analysis, availability of comparables, and the economically significant characteristics of the transaction — and produce a defensible rationale that stands up in documentation and audit.
When to Use
Invoke this skill when the user asks to:
- Select a transfer pricing method for a described intercompany transaction
- Justify why CUP, RPM, CPM, TNMM, or Profit Split applies (or doesn't)
- Prepare the method-selection narrative for a local file or master file
- Respond to a tax authority challenging the chosen method
- Compare two candidate methods and decide which is more appropriate
- Determine the tested party and profit level indicator for a one-sided method
Inputs Required
Before starting, collect:
- Transaction type: What is being transferred — tangible goods, services, IP/royalties, financing, or a cost contribution
- Entities and roles: Which related parties are involved and their legal/economic relationship
- Functional profile: Functions performed, assets used (esp. intangibles), and risks assumed by each party
- Value drivers / intangibles: Any unique or valuable intangibles, and which party developed, enhances, or controls them
- Comparables availability: Whether internal comparables or reliable external comparables exist
- Jurisdictions involved: Countries of the parties (affects local rules and audit posture)
- Financial data available: Gross margin, operating margin, cost base, or transaction-level pricing data on hand
If functional detail is thin, ask one clarifying question about which party owns and controls the economically significant risks and intangibles — this most often determines the outcome.
Instructions
Step 1: Characterize the Transaction and Perform a Functional Cut
Establish the economic substance before touching methods:
- Identify the tested party candidate: The party with the less complex functional profile and no unique intangibles — this is who a one-sided method will test
- Locate the intangibles: Determine which party performs the DEMPE functions (Development, Enhancement, Maintenance, Protection, Exploitation). The party controlling unique intangibles is generally not the tested party
- Map functions/assets/risks to each party in a two-column split so asymmetries are visible
- Classify the transaction as: tangible goods, routine services, IP licensing/royalty, intra-group financing, or shared-value (both sides contribute unique intangibles)
Step 2: Screen All Five Methods Against Applicability Gates
Run each method through its threshold conditions. A method fails the gate if a condition is not met.
CUP (Comparable Uncontrolled Price) — most direct, preferred when applicable
- Gate: A reliable comparable price exists (internal preferred, external acceptable)
- Product/service must be highly similar; comparability adjustments must be reasonably quantifiable
- Best for: commodities, financing (with benchmarked rates), and transactions with an internal CUP
RPM (Resale Price Method) — tests a distributor's gross margin
- Gate: Tested party is a reseller that adds limited value and does not own marketing intangibles
- Requires reliable gross-margin comparables; sensitive to accounting consistency
- Best for: distributors/marketers of tangible goods that resell without significant transformation
CPM (Cost Plus Method) — tests a manufacturer's or service provider's gross markup on costs
- Gate: Tested party performs routine manufacturing or services; cost base is reliable and consistently measured
- Best for: contract/toll manufacturers and routine intra-group service providers
TNMM (Transactional Net Margin Method) — tests a net-level PLI
- Gate: Reliable gross-margin comparables are unavailable, but net-margin comparables exist
- More tolerant of product and accounting differences than RPM/CPM
- Best for: the common real-world case where one party is routine and external net-margin comparables are the most reliable data
Profit Split — two-sided, splits the combined profit
- Gate: Both parties make unique and valuable contributions, OR operations are so integrated that they cannot be reliably evaluated separately
- Variants: contribution analysis (split by relative value of contributions) or residual analysis (route routine returns first, then split the residual tied to intangibles)
- Best for: highly integrated operations and shared-intangible / co-development scenarios
Step 3: Apply the "Most Appropriate Method" Selection Logic
OECD does not mandate a rigid hierarchy, but apply this practical order:
- If a reliable CUP exists → CUP wins. Direct comparison is strongest.
- If no CUP but one party is clearly routine → choose a one-sided method (RPM / CPM / TNMM) with the routine party as tested party. - Prefer RPM for resellers, CPM for routine producers/service providers when reliable gross-level comparables and consistent accounting exist - Default to TNMM when accounting/gross-margin comparability is weak — net margins are more robust to those differences
- If both parties contribute unique intangibles or operations are inseparable → Profit Split.
Step 4: Select Tested Party and Profit Level Indicator (for one-sided methods)
- Tested party: The least complex party with no unique contributions and for which the most reliable comparables exist
- PLI selection:
- Distributors → Operating Margin (Berry ratio in limited cases)
- Manufacturers → Full-Cost Markup or Return on Total Costs
- Service providers → Net Cost Plus
- Asset-intensive parties → Return on Assets / Return on Capital Employed
- State the tested party's financial data requirement and confirm it is available
Step 5: Assess Comparability and Reliability
Grade the recommendation against the five OECD comparability factors:
- Characteristics of property/services, functional analysis, contractual terms, economic circumstances, business strategies
- Note the largest comparability risk and the adjustment (if any) that would improve reliability
- Flag data limitations that could weaken the position in audit
Step 6: Deliver the Ranked Recommendation and Defense Narrative
- Present the primary method with a clear rationale tied to the functional analysis
- Present the secondary/fallback method and why it ranks below the primary
- Provide a one-paragraph documentation narrative phrased for insertion into a local file's method-selection section
- Note the most likely tax authority objection and the counter-argument
Output Format
- Structure: Functional summary → method screening table → most-appropriate-method conclusion → tested party & PLI → comparability grade → defense narrative
- Length: 800–1,200 words
- Format: Structured document with a five-method screening table; rationale in prose
- Sections: Transaction & Functional Summary → Method Screening (5-method table with Gate Met? / Fit / Notes) → Recommended Method + Rationale → Fallback Method → Tested Party & PLI → Comparability & Reliability → Documentation Narrative → Likely Objection & Counter
- Tone: Transfer pricing specialist — precise, OECD-anchored, defensible; conclusions stated plainly, not hedged into ambiguity
Quality Checklist
Before delivering output, verify:
- [ ] All five methods (CUP, RPM, CPM, TNMM, Profit Split) are screened against their applicability gates
- [ ] The recommendation is tied to the functional analysis and DEMPE/intangible ownership — not asserted generically
- [ ] A tested party and a specific PLI are named whenever a one-sided method is recommended
- [ ] Both a primary and a fallback method are stated, with the reason the fallback ranks lower
- [ ] At least one specific comparability risk and one likely tax authority objection are identified
- [ ] The documentation narrative is written so it could drop into a local file without further editing
Notes
- Method selection is driven by the functional analysis first — screening methods before identifying who owns the intangibles produces indefensible conclusions
- TNMM is the most commonly applied method in practice because reliable gross-margin comparables are frequently unavailable; do not treat that as a weakness, but document why gross-level methods were rejected
- Profit Split is over-applied by inexperienced analysts — reserve it for genuine two-sided unique contributions or truly inseparable operations, not merely for high-profit transactions
- When jurisdictions have local rules diverging from OECD (e.g., prescribed method hierarchies or safe harbors), flag that the recommendation should be reconciled against local regulations before filing
How to use this skill
This file is a Claude Code skill in Anthropic's standard format — markdown with YAML frontmatter at the top.
Installing in Claude Code:
~/.claude/skills/<folder-name>/SKILL.md— auto-loads in every session anywhere on your machine (recommended for skills you'll use across multiple projects)<your-project>/.claude/skills/<folder-name>/SKILL.md— auto-loads only when working in that project (recommended for project-specific skills)
Restart Claude Code or open a new session to register.
Using in Claude.ai, ChatGPT, Gemini, or other AI tools:
- Drag this file into a new chat, or copy and paste its contents
- Send your task or request as your next message — the AI will apply the skill where it fits
For Claude Code skill details: https://docs.anthropic.com/en/docs/claude-code/skills