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2. Case Study 1 - Traditional Transfer Pricing Methods TRANSFER PRICING CASE STUDIES WORKSHOP SAN JOSE 31 MARCH - 4 APRIL 2014 OECD freely authorises the.

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Presentation on theme: "2. Case Study 1 - Traditional Transfer Pricing Methods TRANSFER PRICING CASE STUDIES WORKSHOP SAN JOSE 31 MARCH - 4 APRIL 2014 OECD freely authorises the."— Presentation transcript:

1 2. Case Study 1 - Traditional Transfer Pricing Methods TRANSFER PRICING CASE STUDIES WORKSHOP SAN JOSE 31 MARCH - 4 APRIL 2014 OECD freely authorises the use of this material for non-commercial purposes. All requests for commercial uses of this material or for translation rights should be submitted to The opinions expressed and arguments employed herein are those of the author and do not necessarily reflect the official views of the OECD or of the governments of its member countries.

2 Independent Wholesaler Costa Rica Associated Wholesaler Costa Rica Champagne Producer France ( controlled) transaction Transfer Price? 2 Facts of the Case The associated wholesaler (subsidiary) incurs transportation costs of 1.50 EUR. The independent wholesaler incurs no transportation costs. Retailer Costa Rica EUR Independent Champagne Producer France (uncontrolled) transaction Sales Price 6 EUR Retailer Costa Rica 15 EUR

3 Questions 1. Which factors should be taken into account in determining the arms length transfer price for one bottle of champagne sold by the French producer to its associated Costa Rican subsidiary? 2. Which company should be selected as tested party and why? 3. What transfer pricing method is the most appropriate method to the circumstances of this case and why? 4. What is the arms length transfer price per bottle of champagne sold by the French producer (parent company) to its associated Costa Rican subsidiary?

4 Calculate gross margin for distributor/reseller Easiest to apply if reseller does not add substantially to value of product 4 RESALE PRICE METHOD Distributor Third Party Customer Manufacturer Transfer Price Sales Price to Third Party Multinational Enterprise Group Sales Price to 3 rd Party - Gross Profit Margin Transfer Price Tested Party

5 RESALE PRICE METHOD P&L Account Sales Costs of Goods Sold Gross Profit Operating Expenses Net Operating Income Gross profit level indicator Looks at gross profit relative to sales 5

6 Calculation of Arms length price (ALP): ALP = Resale Price - (Resale Price Margin x Resale Price) Resale Price Margin = Sales Price - Purchase Price S ales Price 6 RESALE PRICE METHOD

7 Determined from comparable companies Sale Price to Third Parties $ 100 Resale Price margin 20% Arms length price = $ (20% x $100) = $ 80 7 RESALE PRICE METHOD

8 Independent Wholesaler Costa Rica Associated Wholesaler Costa Rica Champagne Producer France ( controlled) transaction Transfer Price? 8 Example The associated wholesaler incurs transportation costs of The independent wholesaler incurs no transportation costs. Retailer Costa Rica Independent Champagne Producer France (uncontrolled) transaction Sales Price 6 EUR Retailer Costa Rica 15

9 9 Example Retail price charged by independent wholesaler % Purchase price paid by independent wholesaler % Gross profit / margin of the independent wholesaler9.0060% Retail price charged by independent wholesaler % Purchase price paid by independent wholesaler % Adjustment for CIF – FOB12% of sales price % Gross profit / margin of the independent wholesaler % Solution

10 10 Example Retail price charged by dependent wholesaler % Purchase price paid by dependent wholesaler TP??? Gross profit / margin of the dependent wholesaler??? Retail price charged by dependent wholesaler % Purchase price paid by dependent wholesaler % Gross profit / margin of the dependent wholesaler9.0072% Calculating the AL price

11 Questions and/or comments?


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