---
name: transfer-pricing-method-selector
description: "Evaluates a described intercompany transaction and recommends the most appropriate transfer pricing method (CUP, Resale Price, Cost Plus, TNMM, or Profit Split) with a functional-analysis-driven rationale grounded in OECD Guidelines Chapter II, including a ranked method comparison, tested party and PLI selection, comparability factors, and documentation defensibility notes. Use when selecting or defending a transfer pricing method for an intercompany transaction, preparing local file documentation, or responding to a tax authority challenge on method appropriateness."
argument-hint: "[transaction-type] [functional-profile]"
allowed-tools: ["Read"]
---

# Transfer Pricing Method Selector

## 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:
1. If a reliable **CUP** exists → CUP wins. Direct comparison is strongest.
2. 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
3. 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

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## How to use this skill

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1. Drag this file into a new chat, or copy and paste its contents
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