The resale price method analyzes transfer pricing between associated enterprises, focusing on the markup earned by resellers on goods purchased from related suppliers.
Key Features:
- Compares resulting gross profit margin to those of independent companies performing similar resale activities
- Considers functions, assets employed and market conditions influencing an arm’s length price
- Requires reliable comparables, as well as aggregating multiple years of financial data
Example:
Tax authorities employed the resale price method to verify arm’s length transactions between a domestic toy distributor and its parent manufacturer abroad.
Takeaways:
While dependent on appropriate comparables, the resale price method provides a useful approach where limited changes are made to purchased goods. Consistent gross margins support the rationale of internal pricing structures between related entities.