(Imagine being the owner of a Ghanaian MNE business that sells brukina across Accra, Togo and Nigeria. The main entity in Accra makes the base millet mix, a processing facility in Lome bottles it, and a distributor in Nigeria sells to customers. Because all three are related, you can set any “internal price” when the factory sells to the bottler, and when the bottler sells to the marketer and distributor.)
That “internal price” is called a transfer price. If you set those internal prices too high or too low, you can shift profits between places and taxes can end up being paid in the “wrong” place.
That is why tax authorities worldwide including the Ghana Revenue Authority ask related parties to price their dealings as if they were independent. This is called the arm’s length principle.
In plain terms, arm’s length means “Price it like you would to a stranger in the open market.” It helps avoid tax disputes and double taxation by keeping pricing fair and market‑based. It posits that related companies must set prices and terms just as independent companies would under similar conditions—no special discounts or mark‑ups just because they are “family”. But how are these intercompany prices set?
Setting the transfer price
To understand the “how”, there is a need to appreciate how these transfer prices are established. The Ghanaian TP rules akin to global guidelines prescribes five main methods. These methods help to check if internal prices look like real‑world prices. Think of them as five different ways of asking, “Would I sell or buy brukina like this if I didn’t know the other party?”.
These have been discussed below:
- Comparable Uncontrolled Price (CUP) – This method follows the logic of “what price will independent sellers charge for the same brukina under similar terms?” If one can find a truly similar deal, CUP is very direct, just compare the price. It is often best for identical products (e.g., a standard 330ml bottle with the same recipe and delivery terms).
- Resale Price Method (RPM) – This method seeks to explore the answer to the following question when asked; “If the Nigerian entity resells brukina to customers, what gross margin would an independent entity keep?” The method requires a backward pricing approach that starts with the kiosk selling price and then you subtract a normal gross margin, and the remainder becomes the arm’s length price the kiosk should pay to the related bottler.
- Cost Plus (CP) Method – Here, the question to be answered is what is a fair mark‑up on the producer’s costs? It entails calculating the Accra factory’s production cost and adding a market mark‑up similar to independent producers. This suits routine manufacturing or services where costs are well tracked. For example, if the factory’s fully‑loaded cost is 6 cedis per bottle and comparable independent producers earn 15% gross mark‑up, an arm’s length price would be 6.90cedis (6 + 0.90).
- Transactional Net Margin Method (TNMM) – This method departs from product pricing and focuses on entity profitability. Specifically, “Is the net profit of the routine entity in line with similar independent businesses?” Instead of focusing on a single price or gross margin, TNMM looks at overall profit ratios (e.g., operating margin) for the simplest related party and compares them to independent peers. For instance, if the Nigerian entity earns a 6% operating margin and independent distributors in similar circumstances earn 5–8% margin, it could be argued that the transfer price is within an arm’s length range under the TNMM.
- Profit Split Method – This method, although motivated by entity profit rather than product pricing, is useful where parties to an arrangement truly co‑create unique value (e.g., brand and secret recipe). First, it requires you to determine the combined profit from the integrated brukina business; then split it based on each party’s contributions (functions, assets, risks). It is useful for highly integrated models with unique intangibles on both sides. For example, if the brukina recipe (owned in UK) and a powerful Accra brand team both drive global success, the factory and marketing entity might split residual profit after giving routine returns to distribution reflecting who creates the brand and taste that customers love.
Which method should a business use?
There is no “one‑size‑fits‑all” method. Around the world, the rule is to “pick the most appropriate method” based on relevant facts such as what independent parties would do, the data available, and who does what in the business value chain. Businesses often start with transaction‑based methods (CUP, RPM, CP) when good data exists; otherwise, TNMM or, for integrated intangibles, profit split can fit better. The goal is always to reflect market reality.
In real life scenarios, it is not always easy to find identical third‑party prices. That is why many MNE Groups rely on TNMM with carefully chosen independent comparables and sensible adjustments.
CUP remains ideal when truly comparable prices exist; RPM and CP are effective when a distributor or manufacturer is routine and data on gross margins or mark‑ups is available. For unique brands and recipes with shared value creation, profit split may better mirror reality.
The big picture: avoiding disputes and double taxation
Done well, transfer pricing is not about “maximising tax tricks” rather it is about fair, market‑like outcomes that both taxpayer and tax authority can accept, reducing the risk of audits, penalties, and profits being taxed twice. That is the point of the arm’s length principle and the international guidance behind it.
Author: Kingsley Owusu-Ewli
Email:kingsley.owusu-ewli@pwc.com
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DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.
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