In the application of Transfer Pricing, Taxpayers often face obstacles regarding the absence of perfect comparable data to apply traditional methods like CUP, Resale Price, or Cost Plus. When market price or gross margin data is unavailable or insufficiently reliable due to functional and accounting differences, the Transactional Net Margin Method (TNMM) becomes the solution most commonly used globally, including in Indonesia.
Based on MoF Regulation (PMK) 172 of 2023, TNMM is defined as a transfer pricing determination method carried out by comparing the net operating profit level of the tested party with the net operating profit level of comparables from comparable independent transactions.
TNMM tests transaction fairness by looking at the "bottom line" or operating profit (EBIT - Earnings Before Interest and Tax). The basic principle is that in a perfect competition market, companies performing similar functions, using similar assets, and assuming similar risks, should yield similar net profit returns, even though the products sold might be different.
OECD TPG 2022 and UN Manual 2021 affirm that TNMM operates in a way similar to the Cost Plus or Resale Price methods, but the comparison is carried out at the net operating profit level relative to a certain basis (such as sales, costs, or assets), not at the gross profit level.
In Indonesia, method selection must follow the The Most Appropriate Method principle. Based on Article 9 paragraph (7) of PMK 172/2023, TNMM can be selected if traditional transactional methods (CUP, RPM, CPM) cannot be applied reliably, and the transaction meets the following characteristics:
If both parties possess unique contributions or operations are highly integrated, then TNMM is inappropriate and one must switch to the Profit Split Method.
TNMM is a one-sided method (one-sided method), meaning we only need to test the profit fairness of one party. Based on UN TP Manual 2021 and PER-22/PJ/2013, the tested party must be the entity possessing the simplest functions/assets/risks and does not possess unique intangible property.
PLI is a financial ratio to measure profit. The following are PLIs commonly used:
The main advantage of TNMM is its tolerance for product differences. However, OECD TPG 2022 emphasizes that Taxpayers must still ensure:
Pros: Can be applied when gross margin data is unavailable or cost classifications differ. Only needs financial data from one party.
Cons: Can be distorted by management inefficiency. Is one-sided, thus ignoring group systemic profit contributions.
PT IndoManuf (Indonesia) is a contract manufacturer for Global Co (Japan). TNMM is selected as the most appropriate method with FCMU as the PLI.
Result: Because 3% is below the minimum range (5%), a tax correction is performed to raise profit to the median point (7.5%) in accordance with PMK 172/2023.
TNMM is a method that is very powerful and flexible, but its usage must not be indiscriminate. This method is not an "automatic method" if other methods fail. Its application must be based on strong functional analysis to select the appropriate tested party and PLI. Neat documentation regarding the reasons for TNMM selection and the comparable selection process is crucial to mitigate correction risks in tax audits.
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