Transfer pricing methods are standardised techniques used to check whether prices between related parties match those that independent businesses would have agreed. Slovak law, in line with the OECD Transfer Pricing Guidelines, recognises five methods – three traditional transaction methods (the comparable uncontrolled price method, the resale price method and the cost plus method) and two profit methods (the profit split method and the transactional net margin method).
What are transfer pricing methods and what are they for?
Transfer pricing concerns transactions between related parties – close, economically, personally or otherwise connected entities. If two companies in the same group invoice each other for goods, services or licences, or grant each other loans, the price of that controlled transaction must respect the arm’s length principle under Section 17(5) of Act No. 595/2003 Coll. on Income Tax. The price should be the one two independent companies would agree under comparable conditions.
Transfer pricing methods serve to verify this. They are not a formality – the taxpayer uses them to show that intra-group prices do not artificially reduce the tax base in Slovakia. Since 2015 the rules apply to domestic related parties too, not only cross-border relationships, so they reach ordinary family groups with several connected companies.
Which methods does the law recognise?
Section 18 of the Slovak Income Tax Act lists the methods and splits them into two groups – those based on comparing prices and those based on comparing profit. The Czech Republic follows the same five OECD methods under Section 23(7) of its Income Tax Act and Guideline GFŘ D-34, so the toolbox is essentially identical on both sides of the border:
- the comparable uncontrolled price method (CUP) – compares the transaction price directly,
- the resale price method – starts from the onward sale price to an independent buyer,
- the cost plus method – adds a reasonable mark-up to the supplier’s costs,
- the profit split method – divides the combined profit among the parties,
- the transactional net margin method (TNMM) – examines a net profit indicator.
The chosen method is a mandatory part of transfer pricing documentation. For who must keep it and what it must contain, see our overview of transfer pricing documentation in Slovakia and the Czech Republic.
How does the comparable uncontrolled price (CUP) method work?
The CUP method compares the price agreed between related parties with the price of a comparable transaction between independent parties. It is regarded as the most direct and reliable method because it works with the price itself rather than a derived indicator.
Example: if a parent company sells its subsidiary the same type of component it also sells to independent customers, the independent price is a direct comparable. The difficulty arises with unique goods or services for which no comparable market price exists – then CUP is hard to apply and another method is needed.
When to use the resale price and cost plus methods?
The resale price method starts from the price at which goods bought from a related party are then resold to an independent buyer. A usual trade margin, meant to cover the reseller’s costs and a reasonable profit, is deducted from that price. It suits distributors who do not substantially transform the goods but merely resell them.
The cost plus method works the other way round: a reasonable profit mark-up is added to the supplier’s own costs. It is typically used for contract manufacturing or intra-group services, where the costs incurred are clear. Example: a subsidiary manufactures parts solely for its parent and adds to its production costs the usual mark-up an independent manufacturer would earn.
What are the profit methods: profit split and net margin?
Where a price cannot be reliably compared directly, the profit methods come into play. The profit split method divides the combined profit from a transaction among the related parties as independent parties would – according to the functions performed, assets used and risks borne by each side. It applies to closely linked transactions that cannot be assessed separately.
The transactional net margin method (TNMM) examines a net profit indicator, such as the ratio of profit to costs, sales or assets, and compares it with that of independent companies. In practice it is the most frequently used method, because net profit indicators tend to be more readily available than precise comparable prices.
How do you choose the most appropriate method?
The law sets no fixed hierarchy forcing the use of a particular method at all costs. What matters is the most appropriate method for the transaction, determined through a functional analysis – an assessment of the functions performed, assets used and risks borne. The availability of reliable comparable data and the degree of genuine comparability are also weighed.
In practice, where a reliable comparable price exists, the CUP method is preferred. Where it does not, the method that best fits the nature of the transaction and the available data is chosen. The key is to be able to justify the choice – it is precisely the justification that tends to be questioned during an audit, which is where sound tax advisory for companies earns its keep.
Can the methods be combined?
Yes. The law expressly allows a combination of several methods, or even an own method, where none of the standard methods captures the economic substance of the transaction. The condition is that the chosen approach leads to an arm’s length result.
This flexibility helps with more complex transactions but demands more thorough documentation. If you use a non-standard approach, you should explain all the more carefully why the ordinary methods were unsuitable and how yours meets the arm’s length standard.
Not sure which transfer pricing method fits your intra-group transactions? Let us go through it with you before an audit does.
FAQ
How many transfer pricing methods are there?
There are five methods. Three are based on comparing prices – the comparable uncontrolled price method (CUP), the resale price method and the cost plus method. Two are based on comparing profit – the profit split method and the transactional net margin method (TNMM). Which one is most appropriate depends on the nature of the transaction and the comparable data available.
Which method is used most often?
The transactional net margin method (TNMM) is used most often. Net profit indicators of independent companies, such as the ratio of profit to costs or sales, tend to be more readily available than precise comparable prices for specific transactions. That does not make it automatically correct – you must always check that it best reflects the arm’s length principle for the transaction concerned.
Do Slovakia and the Czech Republic use the same methods?
Yes. Both countries follow the OECD Transfer Pricing Guidelines, so the five methods are the same. The legal anchoring differs: in Slovakia the methods are set out in Section 18 of Act No. 595/2003 Coll., while in the Czech Republic they follow from Section 23(7) of Act No. 586/1992 Coll. and Guideline GFŘ D-34. The choice of method in both cases rests on a functional analysis.