The net margin method is one of the most widely used transfer pricing assessment methods. This is used to assess whether an intra-group transaction complies with the market value principle by comparing the profit margin obtained by an affiliated entity involved in the transaction with the profit margin obtained by independent companies carrying out similar transactions. The application of the net margin method is carried out in most cases by developing a comparability study using the databases Orbis, Amadeus, respectively the TP Catalyst platform.

This method differs from other transfer pricing methods in that it has less rigorous criteria when selecting companies considered comparable. This approach is consistent with the provisions of Article 2.68 of the OECD Guidelines, providing a more flexible framework for assessing transfer pricing.

In the assessment of transfer prices for various commercial, manufacturing and service activities, the net margin method is used. By using the net margin method, it is intended to determine profitability at the net margin level, which may be more permissive of differences in the characteristics of products, services or the functional profile of comparable entities. The OECD Guidelines describe the rate of return on turnover, respectively the rate of return on total costs as indicators of economic efficiency used in the application of the net margin method.

In the case of the cost plus and resale price methods, the profitability indicators are determined at the gross margin level, with regard to the net margin method, the profitability indicators used are calculated at the net margin level. Net margin is determined by the ratio of net profit to total revenue.

In order to apply the net margin method, it is necessary to prepare a comparability study through which comparable transactions are identified, then the market range is established and compliance with the market value principle is tested by comparing the profit margin applied by the tested party with the values ​​included in the range of the market.

The net margin method, in a transfer pricing context, focuses on assessing the profitability resulting solely from the analyzed transaction, and not on the overall profit of the entire associated company. This approach is justified when an affiliated company carries out several different transactions, and these transactions, considered as a whole, cannot be adequately compared with the transactions in which a comparable independent company is involved.

Therefore, when applying the net margin method, the profitability resulting from a particular transaction or group of transactions that are sufficiently similar and comparable to transactions carried out by similar independent entities is analyzed. This approach narrows the assessment to the specific activities that are relevant to the transaction or transactions in question and prevents the results from being distorted by the inclusion of other activities that may be irrelevant or insignificant in the context of the transfer pricing analysis. Applying the net margin method at the company-wide level could provide distorted results and would not adequately reflect the assessment of transfer prices in the case of an entity engaged in several types of transactions with different characteristics.

Significant differences that may exist between controlled transactions and those between independent companies should be mitigated by applying appropriate quantitative adjustments. Thus, adjustments can be made for the management of working capital, adjustments for stocks, respectively adjustments for receivables and payables.

In order to obtain correct results and in accordance with transfer pricing legislation, it is recommended to use the Orbis, Amadeus, and TP Catalyst databases regarding the comparability study, but also the calculation and correct interpretation of the results obtained by applying the net margin method for intra- analyzed group.