{"id":406,"date":"2026-06-05T12:19:19","date_gmt":"2026-06-05T12:19:19","guid":{"rendered":"https:\/\/www.dariba.co\/?p=406"},"modified":"2026-06-05T12:19:19","modified_gmt":"2026-06-05T12:19:19","slug":"transfer-pricing-methods","status":"publish","type":"post","link":"https:\/\/www.dariba.co\/?p=406","title":{"rendered":"The Five Transfer Pricing Methods in Saudi Arabia: Which to Use and When"},"content":{"rendered":"\n<style>\n\/* \u2500\u2500 DARIBA.CO \u2014 ARTICLE BODY STYLES (white background compatible) \u2500\u2500 *\/\n:root {\n  --green:        #059669;\n  --green-light:  #d1fae5;\n  --green-dim:    #ecfdf5;\n  --green-border: #6ee7b7;\n  --amber:        #d97706;\n  --amber-light:  #fffbeb;\n  --amber-border: #fcd34d;\n  --blue:         #2563eb;\n  --blue-light:   #eff6ff;\n  --blue-border:  #93c5fd;\n  --red:          #dc2626;\n  --text-primary: #111827;\n  --text-muted:   #6b7280;\n  --text-light:   #9ca3af;\n  --border:       #e5e7eb;\n  --surface:      #f9fafb;\n  --surface-2:    #f3f4f6;\n  --radius:       8px;\n  --radius-lg:    12px;\n}\n.dariba-article {\n  font-family: 'DM Sans', -apple-system, BlinkMacSystemFont, 'Segoe UI', sans-serif;\n  font-size: 1rem;\n  line-height: 1.75;\n  color: var(--text-primary);\n  max-width: 780px;\n}\n.dariba-article p { margin-bottom: 1.1rem; 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padding: 1.5rem; margin: 3rem 0 1.5rem; text-align: center; }\n.dariba-article .series-footer p { font-size: 0.8rem; color: var(--text-muted); margin-bottom: 0.4rem; }\n.dariba-article .series-footer h4 { font-size: 1rem; margin-bottom: 1rem; color: var(--text-primary); }\n.dariba-article .btn-primary { display: inline-block; background: var(--green); color: #ffffff; font-weight: 700; font-size: 0.875rem; padding: 0.65rem 1.5rem; border-radius: var(--radius); text-decoration: none; transition: opacity 0.2s; }\n.dariba-article .btn-primary:hover { opacity: 0.88; color: #ffffff; }\n.dariba-article .also-reading { margin: 2rem 0; }\n.dariba-article .also-reading h4 { font-size: 0.72rem; font-weight: 700; text-transform: uppercase; letter-spacing: 0.08em; color: var(--text-muted); margin-bottom: 1rem; }\n.dariba-article .also-cards { display: grid; grid-template-columns: 1fr 1fr; gap: 0.875rem; }\n@media (max-width: 600px) { .dariba-article .also-cards { grid-template-columns: 1fr; } }\n.dariba-article .also-card { background: var(--surface); border: 1px solid var(--border); border-radius: var(--radius); padding: 1rem; text-decoration: none; display: block; transition: border-color 0.2s, box-shadow 0.2s; }\n.dariba-article .also-card:hover { border-color: var(--green); box-shadow: 0 2px 8px rgba(5,150,105,0.08); }\n.dariba-article .also-card .also-label { font-size: 0.68rem; font-weight: 700; text-transform: uppercase; color: var(--green); letter-spacing: 0.08em; margin-bottom: 0.35rem; }\n.dariba-article .also-card .also-title { font-size: 0.875rem; font-weight: 600; color: var(--text-primary); line-height: 1.4; }\n.dariba-article .disclaimer { font-size: 0.78rem; color: var(--text-muted); border-top: 1px solid var(--border); padding-top: 1rem; margin-top: 2.5rem; font-style: italic; line-height: 1.6; }\n<\/style>\n\n<!-- ARTICLE BODY \u2014 paste into WordPress HTML editor -->\n<div class=\"dariba-article\">\n\n    <div class=\"article-meta\">\n    <\/div>\n\n     <div class=\"series-banner\">\n      Part of <a href=\"\/01_transfer_pricing_saudi_arabia_complete_guide.html\">Transfer Pricing in Saudi Arabia: The Complete Guide<\/a> \u2014 Article 4 of 7\n    <\/div>\n\n    \n<div class=\"section-block\" id=\"basis\">\n<div class=\"section-number\"><span class=\"section-num-badge\">01<\/span><h2>Legal Basis for Method Selection<\/h2><\/div>\n<p>Article 6 of the Saudi TP Bylaws: the arm&#8217;s length remuneration of a controlled transaction must be determined using the method that, under the facts and circumstances, provides the <strong>most reliable measure<\/strong> of an arm&#8217;s length result. Article 7(B) explicitly states that the five approved methods are <strong>not listed in any order of preference<\/strong>.<\/p>\n<p>The selection criteria are: (1) respective strengths and weaknesses of each method; (2) appropriateness for the nature of the transaction, based on the functional analysis; (3) availability of reliable information needed to apply the method; and (4) degree of comparability achievable, including the reliability of any adjustments required.<\/p>\n<p>Article 8: where a taxpayer has applied an approved method consistently with the Bylaws, ZATCA&#8217;s review will be based on that method. A well-reasoned, consistently applied method is the strongest starting point for any ZATCA examination.<\/p>\n<\/div>\n\n<div class=\"section-block\" id=\"cup\">\n<div class=\"section-number\"><span class=\"section-num-badge\">02<\/span><h2>Method 1: Comparable Uncontrolled Price (CUP)<\/h2><\/div>\n<p>The CUP method compares the price charged in a controlled transaction with the price charged in a comparable uncontrolled transaction. It is the most direct expression of the arm&#8217;s length standard \u2014 a like-for-like price comparison.<\/p>\n<p>CUP is most appropriate when: the transaction involves a <strong>commodity with a quoted market price<\/strong>; the taxpayer has its own transactions with independent parties on comparable terms (<strong>internal CUP<\/strong>); the property or services are highly standardised; or for <strong>intercompany loans<\/strong> where market interest rate data is available.<\/p>\n<div class=\"callout\">\n<div class=\"callout-label\">Worked Example \u2014 CUP<\/div>\n<h4>Hajar Commodities Co. \u2014 Aluminium Purchase<\/h4>\n<p>Hajar Commodities Co. (Riyadh, 100% UK-owned) purchases refined aluminium from an independent UK smelter at SAR 4,800\/tonne and from the UK parent at SAR 5,200\/tonne \u2014 identical delivery, volume, and payment terms.<\/p>\n<p>The independent price of SAR 4,800\/tonne is the internal CUP. The SAR 400\/tonne excess in the parent&#8217;s price represents a TP adjustment risk. The analysis works cleanly because the product is identical and terms are the same. Any functional or product difference would require comparability adjustments.<\/p>\n<\/div>\n<\/div>\n\n<div class=\"section-block\" id=\"rpm\">\n<div class=\"section-number\"><span class=\"section-num-badge\">03<\/span><h2>Method 2: Resale Price Method (RPM)<\/h2><\/div>\n<p>The RPM examines the <strong>gross margin<\/strong> earned by a purchaser in a controlled transaction when reselling to independent parties. Most suitable for distribution entities that purchase from related parties and resell without significant processing \u2014 where the reseller performs routine distribution functions without contributing unique intangibles.<\/p>\n<div class=\"callout\">\n<div class=\"callout-label\">Worked Example \u2014 RPM<\/div>\n<h4>Al-Jubail Consumer Products Co.<\/h4>\n<p>Al-Jubail is a Saudi-based distributor (65% owned by a French FMCG group), purchasing finished goods from the French parent and reselling to Saudi retailers, performing local warehousing, marketing, and sales. It holds inventory risk and manages accounts receivable.<\/p>\n<p>A benchmarking study of independent Saudi\/regional FMCG distributors produces an arm&#8217;s length gross margin IQR of 18%\u201327%. Al-Jubail&#8217;s actual gross margin: 22%. Within the range \u2014 no adjustment required.<\/p>\n<p>If the French parent had priced the goods to leave Al-Jubail only 14% gross margin, Al-Jubail is paying too much for the goods. ZATCA could adjust the purchase price downward.<\/p>\n<\/div>\n<\/div>\n\n<div class=\"section-block\" id=\"costplus\">\n<div class=\"section-number\"><span class=\"section-num-badge\">04<\/span><h2>Method 3: Cost Plus Method (C+)<\/h2><\/div>\n<p>The Cost Plus method examines the <strong>mark-up on costs<\/strong> applied to a controlled transaction versus comparable uncontrolled transactions. Most suitable for contract manufacturers, routine service providers, R&amp;D service providers, and intragroup services where cost is the most reliable starting point.<\/p>\n<div class=\"callout\">\n<div class=\"callout-label\">Worked Example \u2014 Cost Plus<\/div>\n<h4>Dammam Contract Manufacturing Co.<\/h4>\n<p>Dammam Contract Manufacturing Co. (100% Japanese-owned) manufactures industrial components under specification. The parent owns the design IP and retains market risk. Dammam&#8217;s annual manufacturing costs: SAR 60 million.<\/p>\n<p>A benchmarking study of comparable contract manufacturers produces an arm&#8217;s length mark-up range on total costs of 5%\u201312% (IQR), median 8%. At the median: arm&#8217;s length charge \u2248 SAR 64.8 million.<\/p>\n<p>If the parent pays only SAR 62 million (3.3% mark-up), Dammam is underpaid. ZATCA may adjust Dammam&#8217;s income upward and increase its CIT base accordingly.<\/p>\n<\/div>\n<\/div>\n\n<div class=\"section-block\" id=\"tnmm\">\n<div class=\"section-number\"><span class=\"section-num-badge\">05<\/span><h2>Method 4: Transactional Net Margin Method (TNMM)<\/h2><\/div>\n<p>The TNMM compares the <strong>net profit margin<\/strong> of the tested party relative to an appropriate base (costs, sales, or assets) with the net profit margin of comparable independent enterprises. By far the most widely used method in practice \u2014 comparable net margins are more readily available from commercial databases, and net margins are less sensitive to functional differences than gross margins.<\/p>\n<p>Common profit level indicators (PLIs):<\/p>\n<div class=\"table-wrap\">\n<table>\n<thead><tr><th>PLI<\/th><th>Formula<\/th><th>Typical Use<\/th><\/tr><\/thead>\n<tbody>\n<tr><td>Operating Profit Margin (OPM)<\/td><td>EBIT \u00f7 Revenue<\/td><td>Distributors, service providers<\/td><\/tr>\n<tr><td>Full Cost Mark-up (FCM)<\/td><td>EBIT \u00f7 Total operating costs<\/td><td>Manufacturers, service providers<\/td><\/tr>\n<tr><td>Return on Assets (ROA)<\/td><td>EBIT \u00f7 Operating assets<\/td><td>Asset-intensive manufacturers<\/td><\/tr>\n<tr><td>Net Cost Plus (NCP)<\/td><td>Operating profit \u00f7 Operating costs<\/td><td>Routine service providers<\/td><\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<div class=\"callout\">\n<div class=\"callout-label\">Worked Example \u2014 TNMM<\/div>\n<h4>Al-Madinah Services Co.<\/h4>\n<p>Al-Madinah Services Co. (60% UAE-owned) provides administrative services to third parties and group entities under identical conditions. Total revenues: SAR 40M. Operating profit: SAR 4.2M. OPM: 10.5%.<\/p>\n<p>TNMM benchmark of comparable Saudi\/regional business services companies: IQR 7%\u201314%, median 9.5%. Al-Madinah&#8217;s 10.5% is within the range \u2014 no adjustment required. The documentation requirement: a benchmarking study with search methodology, comparables&#8217; financial data, and a clear explanation of why the selected comparables are appropriate.<\/p>\n<\/div>\n<\/div>\n\n<div class=\"section-block\" id=\"psm\">\n<div class=\"section-number\"><span class=\"section-num-badge\">06<\/span><h2>Method 5: Transactional Profit Split Method (PSM)<\/h2><\/div>\n<p>The PSM allocates the <strong>combined profit<\/strong> from a controlled transaction between related parties in proportion to the profit allocation that independent parties would have agreed. Applied when: both parties make unique, valuable contributions; the transactions are highly integrated; each party bears significant non-routine risks; or no reliable one-sided comparables exist.<\/p>\n<div class=\"callout\">\n<div class=\"callout-label\">Worked Example \u2014 PSM<\/div>\n<h4>Riyadh Biotech Co. \u2014 Joint Development<\/h4>\n<p>Riyadh Biotech Co. (50% German pharma group, 50% Saudi investors) holds and develops a unique clinical database critical to the group&#8217;s drug development process. The German parent contributes proprietary research methodologies and regulatory expertise. Both contributions are unique and non-routine.<\/p>\n<p>Because both parties make unique intangible contributions and profits depend entirely on their combination, no CUP, RPM, Cost Plus, or TNMM can reliably test either party in isolation. The PSM allocates combined profits based on each party&#8217;s relative contribution \u2014 measured by development costs, expected IP value, or comparable joint development data.<\/p>\n<\/div>\n<\/div>\n\n<div class=\"section-block\" id=\"selection\">\n<div class=\"section-number\"><span class=\"section-num-badge\">07<\/span><h2>Method Selection Framework<\/h2><\/div>\n<p>When selecting a TP method, follow this decision logic:<\/p>\n<ol class=\"article-list\">\n<li>Can you identify a reliable CUP? If yes, and comparability is strong, <strong>CUP is likely most appropriate<\/strong>.<\/li>\n<li>Does the transaction involve purchase and resale of goods by a routine distributor? Is the gross margin benchmarkable? <strong>RPM may apply<\/strong>.<\/li>\n<li>Does the transaction involve provision of services or manufacturing with a well-defined cost base? <strong>Cost Plus may apply<\/strong>.<\/li>\n<li>If direct comparables for price or gross margin are not reliably available, is the net margin of the tested party benchmarkable? <strong>TNMM is the practical default for routine entities<\/strong>.<\/li>\n<li>Do both parties make unique, non-routine contributions that cannot be tested independently? <strong>Profit Split Method<\/strong>.<\/li>\n<\/ol>\n<p>The Local File must document the selection reasoning \u2014 including why alternative methods are less appropriate. A bare assertion that &#8220;TNMM was applied&#8221; without analysis of the alternatives does not meet the documentation standard.<\/p>\n<\/div>\n\n<div class=\"section-block\" id=\"faq\">\n<div class=\"section-number\"><span class=\"section-num-badge\">08<\/span><h2>Frequently Asked Questions<\/h2><\/div>\n<div class=\"faq-list\">\n<div class=\"faq-item\"><button class=\"faq-q\">Does Saudi Arabia give priority to traditional methods over profit methods?<span class=\"faq-icon\">+<\/span><\/button><div class=\"faq-a\">No. Article 7(B) of the Saudi TP Bylaws explicitly states the five approved methods are not listed in any order of preference. The most appropriate method for the specific facts and circumstances governs.<\/div><\/div>\n<div class=\"faq-item\"><button class=\"faq-q\">Can we use more than one method?<span class=\"faq-icon\">+<\/span><\/button><div class=\"faq-a\">Article 8 states it is not necessary to apply more than one method. A second method can be used as a cross-check where the primary selection is uncertain. Where a taxpayer has applied one approved method consistently with the Bylaws, ZATCA will base its review on that method.<\/div><\/div>\n<div class=\"faq-item\"><button class=\"faq-q\">Can we use a non-approved method?<span class=\"faq-icon\">+<\/span><\/button><div class=\"faq-a\">Article 9 permits a non-approved method only where the taxpayer can demonstrate that none of the five approved methods provides a reliable arm&#8217;s length measure. The burden is on the taxpayer to demonstrate all five are unsuitable \u2014 a high threshold.<\/div><\/div>\n<\/div>\n<\/div>\n\n<div class=\"takeaways\">\n<div class=\"takeaways-title\">&#9670; Key Takeaway<\/div>\n<ol>\n<li>Method selection is not mechanical. Each method has specific conditions under which it is most reliable, and the selection must be documented with reasoning.<\/li>\n<li>The five approved methods carry no fixed hierarchy in Saudi Arabia \u2014 the most appropriate method for the specific facts governs.<\/li>\n<li>The Local File must contain a clear, reasoned explanation of why the selected method was chosen and why the alternatives are less appropriate for the specific transaction.<\/li>\n<\/ol>\n<\/div>\n\n\n    <!-- SERIES NAV -->\n    <div class=\"series-footer\">\n      <p>Back to the Complete Guide<\/p>\n      <h4>Transfer Pricing in Saudi Arabia: The Complete Compliance Guide (2024)<\/h4>\n      <a href=\"\/01_transfer_pricing_saudi_arabia_complete_guide.html\" class=\"btn-primary\">Read the Pillar \u2192<\/a>\n    <\/div>\n\n    <!-- ALSO READING -->\n    <div class=\"also-reading\">\n      <h4>Also worth reading<\/h4>\n      <div class=\"also-cards\"><a href=\"\/01_transfer_pricing_saudi_arabia_complete_guide.html\" class=\"also-card\"><div class=\"also-label\">Tax Intelligence<\/div><div class=\"also-title\">Transfer Pricing in Saudi Arabia \u2014 The Complete Compliance Guide (2024)<\/div><\/a>\n<a href=\"\/03_tp_documentation_master_file_local_file_cbcr.html\" class=\"also-card\"><div class=\"also-label\">Tax Intelligence<\/div><div class=\"also-title\">Saudi TP Documentation: Master File, Local File &#038; CbCR<\/div><\/a>\n<a href=\"\/05_intercompany_services_management_fees_saudi_arabia.html\" class=\"also-card\"><div class=\"also-label\">Tax Intelligence<\/div><div class=\"also-title\">Intercompany Services &#038; Management Fees \u2014 TP Compliance<\/div><\/a>\n<a href=\"\/07_zatca_transfer_pricing_audits_adjustments_apa.html\" class=\"also-card\"><div class=\"also-label\">Tax Intelligence<\/div><div class=\"also-title\">ZATCA TP Audits \u2014 Triggers, Adjustments &#038; APA Framework<\/div><\/a><\/div>\n    <\/div>\n\n    <p class=\"disclaimer\">This article reflects the Saudi Transfer Pricing Bylaws (March 2023 version) and the ZATCA Transfer Pricing Guidelines (June 2024 edition). It is for informational purposes only and does not constitute legal or tax advice. Readers should confirm the current position with ZATCA guidance or a qualified Saudi TP advisor. dariba.co is an independent platform with no consulting relationships.<\/p>\n\n\n<\/div><!-- end .dariba-article -->\n\n<script>\ndocument.querySelectorAll('.dariba-article .faq-q').forEach(function(btn) {\n  btn.addEventListener('click', function() {\n    btn.parentElement.classList.toggle('open');\n  });\n});\n<\/script>\n","protected":false},"excerpt":{"rendered":"<p>Part of Transfer Pricing in Saudi Arabia: The Complete Guide \u2014 Article 4 of 7 01 Legal Basis for Method Selection Article 6 of the Saudi TP Bylaws: the arm&#8217;s length remuneration of a controlled transaction must be determined using the method that, under the facts and circumstances, provides the most reliable measure of an [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"class_list":["post-406","post","type-post","status-publish","format-standard","hentry","category-tp"],"_links":{"self":[{"href":"https:\/\/www.dariba.co\/index.php?rest_route=\/wp\/v2\/posts\/406","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.dariba.co\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.dariba.co\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.dariba.co\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.dariba.co\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=406"}],"version-history":[{"count":0,"href":"https:\/\/www.dariba.co\/index.php?rest_route=\/wp\/v2\/posts\/406\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.dariba.co\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=406"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.dariba.co\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=406"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.dariba.co\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=406"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}