Description of the method: the net transaction margin method consists in examining the net profit margin obtained by an entity in transactions or transactions with another related entity and determining it at the level of the margin obtained by the same entity in transactions with independent entities or the margin obtained by independent entities in comparable transactions. The net margin itself can be defined as the difference between the total revenues from the analyzed transaction and the costs incurred, including general and administrative expenses. This particular type of costs is deducted from the revenue, taking into account the ratio of the revenue generated in connection with a given transaction to the total revenue generated by the enterprise.

When using the net transaction margin method, particular attention should be paid to the differences between the entities whose margins are compared. Factors such as:

  1. competition from other market participants and substitute goods,
  2. management effectiveness and strategy,
  3. market position,
  4. differences in the cost structure and the cost of capital acquisition,
  5. business experience.

The net transaction margin method is technically similar to the cost plus method. The feature that differentiates both methods is the freedom to choose the analyzed profitability ratio for which the net margin is tested. This indicator may be, for example, an operating margin or a return on assets or capital employed (and not just a mark-up on costs as in the case of the reasonable margin method). The two methods also differ in the fact that in the calculation of the price using the MTN method, general and administrative costs are taken into account.

The main advantage of the MTN method is the fact that net margins are less dependent than gross margins on the differences in the functions performed by enterprises in the compared transactions. Additionally, when using this method, it is not required to conduct a detailed functional analysis in relation to the parties to the transaction other than the audited entity. Critics of the method, however, point to a number of its drawbacks. The net transaction margin method takes into account factors that have a small or marginal impact on the profit realized on the transaction, such as, for example, quality and management costs. Another disadvantage is analyzing the transaction from the point of view of only one of the entities involved in it, which may distort the conclusions and results achieved through the use of the MTN method.

Comparability of transactions:  required by the provisions of Chapter 2 Study of the comparability of transactions in connection with Chapter 3 Methods of price verification of the Regulation of the Minister of Finance of December 21, 2018 on transfer pricing in the field of corporate income tax

Mathematical formula: CT = (KB + KP + KOZ) * (1 + m) 


CT – transfer price
KB – direct costs
KP – indirect costs related to the
KOZ transaction – general management costs proportionally attributable to the transaction
m – profit margin expressed as a percentage (based on profitability ratios calculated for an uncontrolled transaction)