The Berry Ratio: Why It Should Rarely Be Used

Transfer pricing economists must consider various transfer pricing methodologies when assigning intercompany profits to related parties. Given the difficulty in applying the Comparable Uncontrolled Price ('CUP') and gross margin methods (due to the high level of comparability requirements), the Transactional Net Margin Method ('TNMM'), though considered, until recently, a method of last resort by the Organisation for Economic Co-operation and Development ('OECD'), is often employed.¹ In my experience, I have witnessed many economists electing to apply a Berry Ratio as a transfer pricing methodology without fully understanding the theory behind such an approach. Nothing seems to elicit a stronger response from taxpayers and tax authorities alike than having the Berry Ratio employed to assign profits to related parties operating in different jurisdictions. The Berry Ratio must be used with caution and based on sound theoretical arguments. Since the Berry Ratio assigns a