TP Methods: When is the Resale Price Method Most Appropriate?
Transfer pricing involves determining the prices at which goods, services, or intellectual property are exchanged between related entities within the same MNE group. The objective of transfer pricing is to ensure that these transactions are conducted at arm’s length, reflecting market conditions and preventing tax evasion or profit shifting. Among the various transfer pricing methods available, the Resale Price Method (RPM) is a valuable tool under specific circumstances.
In this blog post, we will explore when the Resale Price Method is most appropriate and its advantages and limitations. Consult with the best transfer pricing advisers in Dubai for assistance. (You can get to know about all the five transfer-pricing methods in our previous blog and we will create a separate blog for the other TP methods subsequently).
Key Components of the Resale Price Method
To understand the Resale Price Method, you need to have a clear idea of its two components. They are
- The Resale Price: It is the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise.
- The Resale Price Margin: The gross margin is the difference between the resale price and the cost of goods sold (COGS). It represents the profit that the distributor should earn.
Resale Price Method in a Nutshell
The resale price margin of the reseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller (taxpayer/associate enterprise) earns on items purchased and sold in comparable (similar) uncontrolled transactions (“internal comparable”…associate enterprises sells to third party) ).
Also, the resale price margin earned by an independent enterprise in comparable (similar) uncontrolled transactions may serve as a guide (“external comparable”…Third party sells to the third party). Where the reseller is carrying on a general brokerage business, the resale price margin may be related to a brokerage fee, which is usually calculated as a percentage of the sales price of the product sold. The determination of the resale price margin in such a case should take into account whether the broker is acting as an agent or a principal.
When Is the Resale Price Method Most Appropriate?
The Resale Price Method is most suitable in certain situations where its application aligns with the economic realities of the controlled transaction. It can be the most appropriate transfer pricing method in marketing operations:
- Distributor and Reseller Relationships: RPM is particularly applicable when a subsidiary acts as a distributor or reseller of products purchased from a related entity, and the primary function of the subsidiary is to resell these products to unrelated customers.
- Stable Market Conditions: It works well when market conditions are relatively stable, and there are no significant fluctuations in product demand or prices.
- Availability of Comparable Data: The Resale Price Method relies on the existence of comparable data, specifically the resale prices of similar products or services in the open market. Therefore, it is most appropriate when such data is readily available and reliable.
- Simple Business Models: RPM is suitable for relatively straightforward business models where the primary profit driver is the resale of goods with minimal value-added activities or unique features.
Advantages of the Resale Price Method
Before choosing the most appropriate transfer pricing method, you need to weigh in on its pros and cons. Transfer pricing experts in Dubai can help you with such an assessment:
- Objective Basis: RPM provides an objective and easily understandable basis for setting transfer prices by comparing the resale price to unrelated customers with a controlled entity’s cost structure.
- Accepted by Tax Authorities: Many tax authorities accept the Resale Price Method, making it a reliable choice for MNEs seeking to comply with transfer pricing regulations.
- Common Practice: It is a widely used method, and comparables for resale prices are often available, reducing the risk of disputes with tax authorities.
Limitations of the Resale Price Method
The limitations of the Resale Price Method are given below:
- Complexity of Gross Margin Determination: Calculating an appropriate gross margin can be challenging and requires a thorough understanding of the controlled entity’s functions, risks, and assets.
- Market Changes: RPM may not be suitable when market conditions are highly dynamic or volatile, as it may not reflect the current economic realities.
- Limited Applicability: It may not be appropriate for situations involving significant value addition, unique products, or complex intangible assets.
Hire the Best Transfer Pricing Advisers in Dubai, UAE
The Resale Price Method is most relevant when dealing with distributor-reseller relationships where the primary function is resale and when market conditions are stable. It offers an objective and widely accepted approach to setting transfer prices that align with the arm’s length principle. However, you need to consult with the best transfer pricing consultants in Dubai such as Tax Gian to avoid any error in judgment while choosing the right transfer pricing method.
Tax Gian, a brand of Jitendra Tax Consultants (JTC), is one of the best companies offering bespoke transfer pricing services in Dubai, UAE. Our tax experts can analyse the circumstances and help you choose the best transfer pricing method. Tax Gian’s team of tax experts in Dubai offers top-notch corporate tax advice for all businesses. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. Contact us today for invaluable advice on any transfer pricing issue concerning your company.