Plain English
This is a simple way of expressing profitability: instead of profit as a percentage of sales, you express it as a percentage of everything it cost to deliver the service or product — direct costs like materials and labour, plus indirect costs like overhead. A full cost mark-up of 8% means the entity earns operating profit equal to 8% of its total cost base. It is the most common way of pricing low-risk service and contract manufacturing arrangements, because cost is usually the most reliable and stable base available for those entities.
Technical definition
A net profit indicator, used principally under the transactional net margin method, calculated as operating profit divided by total costs (direct and indirect operating costs, excluding, in most formulations, pass-through and non-operating items), applied to low-risk service providers, contract manufacturers, and toll manufacturers where cost is the most reliable profit base.
Why it matters
It is the default pricing mechanism for the large volume of low-value, low-risk intercompany services and contract manufacturing arrangements that make up most day-to-day intercompany transactions, so getting the cost base definition right has an outsized impact on total intercompany invoicing.
How it works in practice
- 01Define the cost base: typically all operating costs excluding interest, tax, and often excluding pass-through third-party costs.
- 02Confirm the tested party's risk profile matches a cost-based pricing model — no material market or inventory risk.
- 03Benchmark comparable companies' full cost mark-ups using the same cost base definition.
- 04Apply the resulting mark-up to the tested party's actual cost base each period.
- 05True-up at year end if actual costs and revenue diverge materially from budget.
Worked example
Shared service centre pricing
A shared service centre providing finance and HR support to group affiliates has annual operating costs of USD 10 million. Comparable independent business process outsourcers earn full cost mark-ups of 5% to 9%. Applying a 7% mark-up, the centre invoices affiliates USD 10.7 million in aggregate. If actual costs come in at USD 10.4 million rather than budget, the invoiced amount is trued up to USD 11.1 million (10.4m x 1.07) at year end rather than left at the original budgeted figure.
Common mistakes
- Inconsistent treatment of pass-through costs between the tested party and comparables.
- Applying the mark-up to budgeted costs and never truing up to actual costs.
- Excluding stock-based compensation or other real costs from the base without disclosure.
- Using a full cost mark-up for an entity that actually bears market risk, understating its appropriate return.
Audit red flags
- Cost base definition that changes between the benchmarking study and the actual invoicing calculation.
- No true-up mechanism despite material budget-to-actual variances.
- Mark-up applied to a cost base that includes third-party recharges without a policy on that treatment.
Documentation & data
Documents to hold
- Cost base definition memo, consistent across benchmarking and invoicing.
- Benchmarking study supporting the applied mark-up.
- Invoicing calculation with true-up mechanics.
Data you need
- General ledger cost detail by category for the tested party.
- Comparable companies' cost of sales and operating expense detail.
- Budget-to-actual cost variance data for the true-up.
Who owns this internally: Group tax sets the policy; operational finance runs the invoicing calculation and true-up.
Jurisdiction notes
- OECD member states
- Full cost mark-up is a standard, widely accepted TNMM profit level indicator, especially for low-value services.
- European Union
- The low-value-adding intra-group services simplified approach specifies a fixed mark-up band, avoiding the need for full benchmarking in many cases.
Notes by role
CFOs & finance leaders
A mismatch between the cost base used in the benchmarking study and the one used in your ERP invoicing template is one of the most common, and cheaply fixable, TP errors.
In-house tax teams
Agree the pass-through cost treatment in writing with finance before go-live, not after the first year-end true-up dispute.
Frequently asked
- Is full cost mark-up the same as cost plus method?
- They are closely related but distinct: the traditional cost plus method uses gross mark-up on cost of goods sold, while full cost mark-up is a net profit indicator under TNMM covering total operating costs.
- Should third-party pass-through costs be included in the base?
- Common practice is to exclude them where the entity earns no margin on the pass-through, but this must be applied consistently with the comparables.
Sources & status
- Primary source
OECD Transfer Pricing Guidelines, Chapter II, Part III
OECD, 2022
- Our interpretation
Cost base and true-up practice for low-risk entities
This glossary, 2026
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
Careers
How this shows up in the job
Full cost mark-up calculations are one of the first practical exercises given to new transfer pricing analysts.
Careers in transfer pricing