Choose the Right PLI for Imports under TNMM:
Which Profit Level Indicator (PLI) is most suitable when testing the arm’s length nature of purchases/import of good
Choose the Right PLI for Imports under TNMM:
( understanding what is tainted in the transaction is the key)
One common question in transfer pricing is: Which Profit Level Indicator (PLI) is most suitable when testing the arm’s length nature of purchases/import of goods?
In Majority of the cases, Operating Margin (Operating Profit ÷ Sales) is the most appropriate.
This is because the profitability of a distributor or manufacturer primarily depends on sales revenues generated from the imported goods, making operating margin the right benchmark for comparability.
Other PLIs may apply in (special circumstances):
Berry Ratio (Gross Profit ÷ OPEX): only where the distributor is low-risk with no inventory exposure.
Return on Costs: more suitable for service providers, not import transactions.
Return on Assets: relevant mainly for capital-intensive operations.
Key takeaway: For testing imports under TNMM, Operating Margin is usually the best fit, while other PLIs are limited to specific fact patterns.