Glossary
Transfer Pricing Glossary
Comprehensive definitions of transfer pricing terms, concepts, and methodologies. Your reference guide to TP terminology.
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50 terms
A
- Arm's Length PrincipleALPThe Arm's Length Principle is the international standard for transfer pricing, requiring that transactions between related parties (associated enterprises) be priced as if they occurred between...Core Concepts
- Arm's Length RangeArm's Length Range is the range of financial results (typically PLI values) derived from comparable uncontrolled transactions or companies that represents acceptable arm's length outcomes.Core Concepts
B
- BEPS Action 13BEPS Action 13 is an OECD initiative that established a standardized three tiered approach to transfer pricing documentation: the Master File, Local File, and Country by Country Report (CbCR).Regulatory
- Berry RatioBRThe Berry Ratio is a profit level indicator that divides gross profit by operating expenses:Benchmarking & PLIs
C
- Comparability AnalysisComparability Analysis is the systematic process of identifying and evaluating transactions or companies that are sufficiently similar to the controlled transaction to serve as reliable benchmarks.Process & Methodology
- Comparable CompaniesComparable Companies (also called comparables or comps) are independent enterprises whose financial results are used to benchmark a tested party's profitability under the Transactional Net Margin...Core Concepts
- Comparable Profits MethodCPMThe Comparable Profits Method (CPM) is a US transfer pricing method that evaluates whether the amount charged in a controlled transaction is arm's length by comparing the operating profit of the...Transfer Pricing Methods
- Comparable Uncontrolled Price MethodCUPThe Comparable Uncontrolled Price (CUP) Method is a transfer pricing method that compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction...Transfer Pricing Methods
- Contemporaneous DocumentationContemporaneous documentation refers to transfer pricing documentation prepared before or at the time of filing the tax return for the year in question—not after an audit has commenced.Documentation
- Controlled TransactionA Controlled Transaction is a transaction between two or more associated enterprises (related parties) that is subject to transfer pricing rules.Core Concepts
- Cost Plus MethodThe cost plus method is a transfer pricing method that starts with the supplier's costs for a controlled transaction and adds an arm's length gross mark up.Transfer Pricing Methods
- Country Risk AdjustmentA Country Risk Adjustment is a comparability adjustment that accounts for differences in risk profiles between the jurisdiction of the tested party and the jurisdictions of comparable companies.Adjustments
- Country-by-Country ReportCbCRThe Country by Country Report (CbCR) is a standardized annual filing that provides tax authorities with aggregate financial and tax data for each jurisdiction where a multinational enterprise (MNE)...Documentation
D
- DEMPE FunctionsDEMPEDEMPE functions refer to the Development, Enhancement, Maintenance, Protection, and Exploitation activities related to intangible assets.Core Concepts
- Documentation ThresholdA documentation threshold is the monetary limit (typically based on transaction value, revenue, or assets) that determines whether a taxpayer must prepare formal transfer pricing documentation.Compliance
E
- Economic AnalysisEconomic analysis in transfer pricing refers to the quantitative assessment that demonstrates whether controlled transactions are priced at arm's length.Methodology
- Effective Tax RateETREffective Tax Rate (ETR) in the context of OECD Pillar Two refers to the Jurisdictional Effective Tax Rate —the ratio of Adjusted Covered Taxes to Net GloBE Income for all constituent entities in a...International Tax
- Exit ChargeAn exit charge (also called exit payment, buy out payment, or restructuring compensation) is the arm's length compensation owed when a business restructuring transfers valuable functions, assets, or...Restructuring
I
- Income Inclusion RuleIIRIncome Inclusion Rule (IIR) is the primary charging mechanism under the OECD Pillar Two GloBE Rules.International Tax
- Independence IndicatorIndependence Indicator is a classification code used in commercial databases (particularly Bureau van Dijk's Orbis and Amadeus) to identify a company's ownership structure and degree of independence...Database & Search
- Intercompany AgreementAn intercompany agreement (also called an inter affiliate agreement or related party contract) is a legally binding contract between entities within the same multinational enterprise group that...Documentation
- Interquartile RangeIQRInterquartile Range (IQR) is a statistical measure used in transfer pricing to define the arm's length range by excluding the top and bottom 25% of comparable results.Benchmarking & PLIs
M
- Manual ScreeningManual Screening is the critical step in benchmarking where potential comparable companies identified through database searches are individually reviewed for functional comparability.Process & Methodology
- Master FileThe Master File is a standardized transfer pricing document that provides tax authorities with a high level overview of the multinational enterprise's (MNE) global business operations, transfer...Documentation
- MedianThe Median is the middle value in a dataset when values are arranged in order.Statistics
- Multi-Year AveragingMulti Year Averaging is a methodology that uses financial data from multiple years (typically 3 5 years) to calculate profit level indicators for benchmarking purposes.Methodology
N
- NACE CodeNACEA NACE code identifies a category in the European Union's statistical classification of economic activities.Database & Search
- Net Cost PlusNCPNet Cost Plus (NCP) , also called Full Cost Plus or Return on Total Costs, is a profit level indicator that measures operating profit as a markup on total costs.Benchmarking & PLIs
P
- Penalty ProtectionPenalty protection refers to the legal shield that adequate transfer pricing documentation provides against transfer pricing penalties, even if tax authorities later make an adjustment.Compliance
- Pillar Two / GloBE RulesGloBEPillar Two refers to the OECD/G20 Inclusive Framework's Global Anti Base Erosion (GloBE) Rules, which establish a 15% global minimum effective tax rate for large multinational enterprises (MNEs).International Tax
- Profit Level IndicatorPLIProfit Level Indicator (PLI) is a financial ratio used in the Transactional Net Margin Method (TNMM) and Comparable Profits Method (CPM) to measure a tested party's profitability relative to an...Core Concepts
- Profit Split MethodPSMThe profit split method is a transfer pricing method that identifies the combined profit or loss from controlled transactions and divides it between associated enterprises based on an economically...Transfer Pricing Methods
Q
- Qualified Domestic Minimum Top-up TaxQDMTTQDMTT (Qualified Domestic Minimum Top up Tax) is a domestic tax that a jurisdiction can introduce to collect top up tax on low taxed income of MNE constituent entities located in that jurisdiction.International Tax
- Quantitative ScreeningQuantitative Screening is the initial phase of comparable company selection where database filters are applied to narrow a large population to a manageable set of potential comparables.Process & Methodology
R
- Related-Party TransactionA related party transaction (also called a controlled transaction, intercompany transaction, or associated enterprise transaction) is any commercial or financial dealing between entities that are...Core Concepts
- Resale Price MethodRPMThe resale price method (RPM) is a transfer pricing method that starts with the price at which a related party reseller sells goods to an independent customer, then subtracts an arm's length gross...Transfer Pricing Methods
- Return on AssetsROAReturn on Assets (ROA) is a profit level indicator that measures operating profit as a percentage of total assets.Benchmarking & PLIs
- Return on Operating AssetsROOAReturn on Operating Assets (ROOA) is a profit level indicator that measures operating profit as a percentage of operating assets—assets directly employed in the business operations.Benchmarking & PLIs
S
- Safe HarborA Safe Harbor is a simplified transfer pricing rule that provides taxpayers automatic compliance if specified conditions are met—typically a fixed margin, rate, or pricing formula.Core Concepts
- SIC CodeSICSIC Code (Standard Industrial Classification) is a four digit numerical code system used to classify businesses by their primary economic activity.Database & Search
- Substance-Based Income ExclusionSBIEThe Substance Based Income Exclusion (SBIE) is part of the OECD/G20 Global Anti Base Erosion (GloBE) Model Rules.International Tax
T
- Tested PartyTested Party is the entity in a controlled transaction whose financial results are compared against independent comparables to determine arm's length pricing.Core Concepts
- Top-Up TaxTop Up Tax is the additional tax imposed under the OECD Pillar Two GloBE Rules to bring a jurisdiction's effective tax rate (ETR) to the 15% minimum rate .International Tax
- Transactional Net Margin MethodTNMMThe Transactional Net Margin Method (TNMM) examines the net profit that a taxpayer earns from a controlled transaction, or an appropriate aggregation of transactions, relative to a base such as...Transfer Pricing Methods
- Transfer Pricing PolicyA transfer pricing policy is an organization's documented framework for setting prices and terms for transactions between related entities within a multinational enterprise group.Core Concepts
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