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ARTICLE · 23 DECEMBER 2015

An Economic Framework For Identifying The Tested Party

The Brattle Group, Inc.
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The comparable profit method is a standard method for transfer pricing, particularly when the intracompany transactions are entirely between two related parties and third-party prices...

United StatesTax
Michael Cragg
Michael Cragg
David Hutchings
David Hutchings

The comparable profit method is a standard method for transfer pricing, particularly when the intracompany transactions are entirely between two related parties and third-party prices are therefore not readily observable. A necessary first step in the CPM is identifying the ''tested party'' — the related party whose profits will be determined through the CPM. For example, if entity A sells to entity B, and entity B is the tested party, the revenue to A and costs to B will be the same and set to generate B's level of profit as determined by the CPM.

The regulations under section 482 define CPM in general:

The comparable profits method evaluates whether the amount charged in a controlled transaction is arm's length based on objective measures of profitability (profit level indicators) derived from uncontrolled taxpayers that engage in similar business activities under similar circumstances.1

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