Plain English
Most transfer pricing methods only look closely at one side of a deal. If a distributor buys goods from its parent and resells them, and the distributor is a simple limited-risk business, you benchmark the distributor against similar independent distributors and check its margin lands in range. You do not need to separately analyse the manufacturer's profitability in detail — that is the 'residual' side, and its result is whatever is left over. This is a one-sided method, and it works well precisely because the tested party is the simpler, less unique side of the transaction.
Technical definition
An analytical approach — most commonly the resale price method, cost plus method, or transactional net margin method — under which only the less complex party to a controlled transaction, the tested party, is benchmarked against comparable independent companies, on the basis that it performs routine functions, contributes no unique and valuable intangibles, and does not assume significant unique risks.
Why it matters
Choosing correctly between a one-sided and a two-sided (profit split) approach is often the most consequential methodological decision in a transfer pricing analysis, because one-sided methods are simpler, cheaper to apply, and far more common in practice — but they are only appropriate where one party genuinely is the routine, less complex side.
How it works in practice
- 01Complete the functional analysis to identify which party performs routine functions and which, if either, holds unique intangibles or risks.
- 02Select the less complex party as the tested party.
- 03Choose the appropriate profit level indicator (resale margin, cost mark-up, or net margin) based on the tested party's functions.
- 04Benchmark the tested party against independent comparables performing similar routine functions.
- 05Confirm the residual profit or loss left with the other party is commercially plausible, even though it is not separately benchmarked.
Worked example
Choosing the tested party
A US parent owns valuable technology and brand intangibles; its Mexican subsidiary manufactures under licence and sells only to the parent, bearing no market or credit risk. The subsidiary is the obvious tested party: benchmarked against independent contract manufacturers, its full cost mark-up should fall between 5% and 8%. The US parent, which holds the unique intangibles, is left with the residual profit after the subsidiary's fee — its result is not separately tested because it is the complex, unique party in the relationship.
Common mistakes
- Selecting the tested party based on data availability rather than which party is actually less complex.
- Using a one-sided method when both parties contribute unique, valuable intangibles, where a profit split may be more appropriate.
- Failing to sanity-check that the residual left with the untested party is plausible for an independent enterprise.
Audit red flags
- The party holding the group's key intangibles is chosen as the tested party purely for benchmarking convenience.
- Persistent losses at the untested party with no residual profit rationale.
- No consideration of profit split as an alternative where both sides look complex.
Documentation & data
Documents to hold
- Functional analysis justifying the tested party selection.
- Benchmarking study for the tested party.
- Commentary on the plausibility of the residual result at the other party.
Data you need
- Functional profiles of both parties to the transaction.
- Financial data to benchmark the tested party.
- High-level financials for the other party to sanity-check the residual.
Who owns this internally: The advisor or economist selecting the method, agreed with group tax.
Jurisdiction notes
- OECD member states
- One-sided methods (TNMM in particular) remain the most commonly applied approach globally due to their relative simplicity.
- United States
- The comparable profits method, the U.S. domestic analogue to TNMM, is the most frequently used one-sided method in practice.
Notes by role
Students & job seekers
Tested party selection is one of the most frequently asked conceptual questions — practise identifying the 'less complex' party from a short fact pattern.
Advisors & consultants
Document why the untested party's residual is commercially sensible; silence on this point is a common review comment.
Frequently asked
- Which methods are one-sided?
- The resale price method, cost plus method, and transactional net margin method are all one-sided; the CUP method can apply to either side; the profit split method is two-sided by design.
- What if both parties look equally complex?
- A one-sided method may not be reliable, and a transactional profit split should be considered instead.
Sources & status
- Primary source
OECD Transfer Pricing Guidelines, Chapter II, Parts II-III
OECD, 2022
- Our interpretation
Tested party selection practice
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
Explaining the logic of tested-party selection clearly is one of the highest-value conceptual answers in a TP interview.
Careers in transfer pricing