Page 74 - Strategic Tax Planning for Global Commerce & Investment

Tax Benefits for U.S. Exporters

As in the resale price method, comparability under the cost-plus
method is less dependent on the close physical similarity
between products transferred. Product differences are permitted,
but within limits, in applying the cost-plus method. Substantial
product differences tend to indicate functional differences.

Differences and Adjustments

Adjustments could be made under the cost-plus method for the
differences between controlled transactions and uncontrolled
transactions. Differences are material if they affect the gross
profit mark up. Adjustments should be made to the gross profit
earned in comparable uncontrolled transactions.

The adjustments, generally, reflect operating expenses associated
with the functions performed and the risks assumed. Differences
in functions performed are often reflected in operating expenses.
The following factors could be relevant to the cost-plus method:

1. The complexity of the manufacturing pro-
cess or of the assembly operations
2. Manufacturing, production and process en-
gineering.

3. The extent of the procurement, purchasing
and inventory control activities.
4. The testing functions
5. Selling, general and administrative expens-
es.
6. Foreign currency risks
7. Contract terms, such as, warranties provid-

ed, volume of sales or purchases, credit
terms and transport terms.

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