Page 72 - Strategic Tax Planning for Global Commerce & Investment

Tax Benefits for U.S. Exporters

controlled sale is US$ 100 and the reseller’s gross margin is 20%,
which is viewed as arm’s-length. The arm’s-length price is US$
80 which is US$100 minus 20% of the US$ 100 resale price.

The determination of gross margin can be complex for transfer
pricing purposes and could require several steps. In the current
example the state gross profit margin of 20% is used directly for
transfer pricing purposes without changing the gross profit
margin. In addition, there are no changes in the beginning and
ending inventory for the year under review. Furthermore, the
information regarding an uncontrolled comparable is sufficiently
complete to conclude that it is likely that all material differences
between controlled and uncontrolled transactions have been
indentified and adjusted for.

3. Cost - Plus Method

Under the cost-plus method, the costs incurred by a supplier of
goods and services are marked up so as to give a profit margin
commensurate with the functions, assets and risks of the entity
concerned. What is arrived at after adding the cost-plus mark-up
to the costs incurred by the supplier may be regarded as the
arm’s-length price of the original controlled transaction.

Thus, the cost-plus transfer pricing method combines the cost
incurred to produce the property with the gross profit mark up
from the costs. The amount charged in a controlled transaction is
compared with comparable uncontrolled transactions in
evaluating whether the gross profit mark up is arm’s-length. The
gross profit is computed by multiplying the controlled
enterprises’ cost of producing the transferred property by the
gross profit mark up. The appropriate gross profit is expressed
as a percentage of cost.

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