Page 75 - Strategic Tax Planning for Global Commerce & Investment

Strategic Tax Planning for Global Commerce and Investment

Consistency in Accounting

The cost-plus method requires consistency in accounting. The
degree of consistency in accounting practices affects the
reliability of the results. Reliability depends on the completeness
and accuracy of the data and the reliability of the assumptions.

Consistency between controlled transaction and the uncontrolled
comparables focuses on comparables that materially affect the
gross profit margin. Adjustments could reflect differences in
inventory and other cost accounting practices that might
materially affect the gross profit mark up.

The consistency in accounting includes reporting costs between
cost of goods sold and operating expenses

Example:

Transactions with Relatively Complete Data

XYZ, a US manufacturer of computer components, sells its
products (the components) to FD, its foreign distributor. XYZ
has three competitors, ABC, CDE and EFG, who are also, US
computer component manufacturers that sell components to
uncontrolled foreign purchasers.

Relatively complete data is available concerning ABC, CDE and
EFG. This data pertain to functions performed by each of the
three entities. The data include the risks borne by each party,
together with the contractual terms that each party uses in the
controlled transactions. In addition, data is not available to
ensure accounting consistency between all the uncontrolled
manufactures and XYZ and, thus, can use the arm’s-length range
because of the following reason.

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