Methods & benchmarking
Best Method Rule
The best method rule requires taxpayers to select the transfer pricing method that provides the most reliable measure of an arm's length result given the facts of the transaction. Relevant factors include comparability, the quality of available data, and the reliability of adjustments needed to improve comparability.
Under OECD guidance, there is no strict hierarchy among the five methods, though traditional transaction methods are generally preferred when applicable with equal reliability. In practice, data availability often drives selection, since gross margin and price data is far scarcer than net margin data available.
Applying the rule involves assessing comparability factors such as contractual terms, functions, and risks, then choosing the method needing the fewest reliable adjustments. Some jurisdictions, including the United States, require explicit documentation of why the selected method was chosen over alternatives.
In practice
What matters when applying best method rule
- No strict hierarchy of methods under OECD rules
- Selection depends on facts and data quality
- Traditional methods preferred when equally reliable
- Fewer required adjustments improve reliability
- Some jurisdictions require formal documentation
Frequently asked
Common questions
Is there a strict order in which transfer pricing methods must be tried?+
Under the OECD Transfer Pricing Guidelines there is no mandatory hierarchy, though traditional transaction methods such as CUP, cost plus, and resale price are generally preferred over transactional profit methods when both can be applied with equal reliability. In practice the choice depends heavily on which method the available comparable data can support most robustly, so TNMM is very commonly selected due to greater data availability.
What factors determine the most reliable method?+
The most reliable method is determined by comparability between the controlled and uncontrolled transactions, the completeness and accuracy of the data used, the reliability of assumptions made, and the extent and reliability of adjustments needed to eliminate material differences. A well-documented functional analysis is essential, since it identifies which comparability factors matter most for the specific transaction being tested.
See how the tooling handles this in practice
Our transfer pricing tools calculate intercompany charges, benchmark financing and reconcile the intercompany ledger from your own data. Book a short walkthrough and we will show the workflow on a scenario that matches your group structure, rather than a generic demo dataset.