Transfer Pricing Tool
for Manufacturing

Transfer Pricing for Manufacturing: OECD Methodology

Manufacturing is one of the most common sectors requiring transfer pricing documentation. Multinational manufacturing groups typically structure their operations with a principal entity that owns the intellectual property and bears entrepreneurial risk, while contract manufacturers in lower-cost jurisdictions perform routine production functions. Under the OECD Transfer Pricing Guidelines (2022), the Transactional Net Margin Method (TNMM) is overwhelmingly the most applied method for benchmarking contract manufacturers, because it compares the net profit margin of the tested party against independent comparables — and reliable comparable data is widely available for manufacturing entities in databases such as Amadeus, Orbis, and Bureau van Dijk.

The selection of the tested party in manufacturing transfer pricing follows the least complex entity principle. In a typical structure where a principal entity in the Netherlands or Germany contracts production to a factory in Poland or Romania, the contract manufacturer is the tested party because its functions, assets, and risks are routine and easier to benchmark. The principal entity's return is determined residually. OECD Guidelines ¶2.59–2.65 support this approach: the TNMM should be applied to the party for which reliable comparables exist and which performs the simpler functions.

For contract manufacturers, the two standard Profit Level Indicators (PLIs) are operating margin (operating profit divided by revenue) and net cost plus (operating profit divided by total costs). Operating margin is preferred when the manufacturer has pricing authority over its output; net cost plus is preferred for toll manufacturers who do not bear inventory risk. Typical arm's length operating margins for European contract manufacturers range from 3% to 8%, depending on the complexity of the manufacturing process, the level of automation, workforce skills, and whether the manufacturer bears any raw material procurement risk. Comparability adjustments — particularly for working capital differences and capacity utilisation — are critical in manufacturing benchmarking studies (OECD ¶3.47–3.54).

Recommended Method: TNMM (Transactional Net Margin Method)

For manufacturing entities, the tnmm (transactional net margin method) is typically the most appropriate transfer pricing method. This tool pre-selects this method based on industry best practice and OECD guidance. Typical arm's length ranges for manufacturing are 3–8%.

Typical Manufacturing Intercompany Transactions

Sale of finished goods to distribution affiliate — Contract manufacturer sells assembled products to a related-party distributor in another jurisdiction. Tested party is typically the manufacturer as the least complex entity. Preferred method: TNMM (Transactional Net Margin Method).

Contract manufacturing services — Toll or contract manufacturing where the principal supplies raw materials and IP. The manufacturer earns a routine return for its functions, assets, and risks. Preferred method: TNMM (Transactional Net Margin Method).

Raw material procurement from related parties — Centralised procurement entity purchases raw materials and on-sells to manufacturing affiliates. CUP may apply where commodity prices are publicly quoted. Preferred method: CUP (Comparable Uncontrolled Price).

Regulatory Context

Manufacturing entities with significant cross-border intercompany transactions are high on the transfer pricing audit priority list in most OECD jurisdictions. EU member states increasingly coordinate TP audits through the Joint Transfer Pricing Forum. The EU Directive on Transfer Pricing (proposed 2024) may harmonise documentation requirements across member states.

Limitation: This tool implements CUP, Cost Plus, and TNMM. For manufacturing groups where the principal and contract manufacturer share risks and intangibles, a transactional profit split method may be more appropriate — consult a transfer pricing specialist for profit split analysis (OECD ¶2.108–2.145).