If you are looking for more information on the Resale Price Method with an example, this article will interest you. Below, we explain the method in more detail, give you an example and explain when and how to use it.
Before we continue, it is important to understand that the Resale Price Method is one of the common “transfer pricing methods” used to examine the “arm’s-length” nature of “controlled transactions.” If these terms don’t ring a bell, we advise you to first read our articles What Is Transfer Pricing? and Five Transfer Pricing Methods With Examples.
What Kind Of Transfer Pricing Method Is The Resale Price Method?
The OECD Transfer Pricing Guidelines provides 5 common transfer pricing methods that are accepted by nearly all tax authorities. They are divided into “traditional transaction methods” and “transactional profit methods.” The Resale Price Method is a traditional transaction method.
Traditional transaction methods measure terms and conditions of actual transactions between independent enterprises and compares these with those of a controlled transaction.
This comparison can be made on the basis of direct measures such as the price of a transaction but also on the basis of indirect measures such as gross margins realized on a particular transactions.
The Resale Price Method
The Resale Price Method is also known as the “Resale Minus Method.” As a starting position, it takes the price at which an associated enterprise sells a product to a third party. This price is called a “resale price.”
Then, the resale price is reduced with a gross margin (the “resale price margin”), determined by comparing gross margins in comparable uncontrolled transactions. After this, the costs associated with the purchase of the product, like custom duties, are deducted. What is left, can be regarded as an arm’s length price for the controlled transaction between associated enterprises.
The below image is an example of the Resale Price Method:
Resale Price Method Example
With the above image in mind, let’s look at a Resale Price Method example:
Apple & Pear, based in Hong Kong, brews a very exclusive non-alcoholic beverage called “the Mountain.” It sells this beverage to high-end nightclubs around Asia via associated distributors. The market price for one can of “the Mountain” is USD 100. Apple & Pear does not sell the beverage to independent distributors. Also, there is no company in Asia that brews a comparable beverage.
However, there are comparable distributors that sell “the Vulcano.” This is a competing alcoholic beverage brewed by Gin & Juice, a company also based in Hong Kong. The market price for one bottle of “the Vulcano” is USD 100. In addition, distributors report USD 5 gross margin per bottle sold with 2 USD on custom duties.
Apple & Pear wants to set the transfer price for the supply of “the Mountain” to the associated distributors. There is no Internal Cup (no third party transactions by Apple & Pear) or External Cup (no comparable transactions). Therefore, the CUP method can’t be applied here (The CUP Method with example).
In our example, the distributors of “the Vulcano” are comparable to the distributors of “the Mountain.” The result is that the gross margin and custom duties reported can be used as input for the Resale Price Method.
This would look as follows:
In this example, when using the Resale Price Method, Apple & Pear needs to charge a transfer price of 93 USD to its associated distributors.
Use of Resale Price Method in practice
The Resale Price Method requires that third party transactions are comparable with the controlled transaction. As a result, there can be no differences that have a material effect on the resale price margin. Because each transaction is unique, it is quite difficult to meet this requirement.
Therefore, the Resale Price Method is not often used.
However, in case sufficient comparable transactions are available the Resale Price Method can be useful to determine transfer prices. The reason is that in such a case, third party sales prices are easily found.
Resale Price Method With Example – Conclusion
The Resale Price Method is one of the 5 common transfer pricing methods provided by the OECD Guidelines. First of all, it takes as a starting position the price at which an associated enterprise sells a product to a third party (the “resale price”). It then reduces this price with a gross margin (the “resale price margin”). This margin is determined by comparing gross margins in comparable uncontrolled transactions.
The Resale Price Method is not often used. The reason is that it is difficult to find comparable transactions. However, in case those can be found, the Resale Price Method is suitable to examine gross margins of associated enterprises engaged in sales and distribution to third parties.
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