Direct charge method

The direct charge method is a transfer pricing technique used to establish an arm’s length price for intercompany transactions, particularly those involving the transfer of goods or services. Under this method, the transfer price is determined by adding an appropriate profit margin to the actual direct costs incurred in producing or delivering the goods or services. This ensures that the price reflects conditions that would exist between unrelated parties in a competitive market.

Example: If a parent company manufactures products for its subsidiary, it may determine the transfer price by adding a reasonable markup to the direct manufacturing costs, ensuring compliance with arm’s length standards.