Presentation on theme: "2. Case Study 1 - Traditional Transfer Pricing Methods"— Presentation transcript:
12. Case Study 1 - Traditional Transfer Pricing Methods TRANSFER PRICING CASE STUDIESWORKSHOP SAN JOSE 31 MARCH - 4 APRIL 20142. Case Study 1 - Traditional Transfer Pricing MethodsOECD 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 toThe 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.
2Associated Wholesaler Costa Rica Independent Champagne Producer Facts of the Case(controlled) transactionTransfer Price?Associated Wholesaler Costa RicaChampagne ProducerFranceEURRetailer Costa Rica(uncontrolled) transactionSales Price 6 EURIndependent Champagne ProducerFranceIndependentWholesaler Costa Rica15 EURRetailer Costa RicaThe associated wholesaler (subsidiary) incurs transportation costs of 1.50 EUR.The independent wholesaler incurs no transportation costs.External Comparable
3QuestionsWhich factors should be taken into account in determining the arm’s length transfer price for one bottle of champagne sold by the French producer to its associated Costa Rican subsidiary?Which company should be selected as tested party and why?What transfer pricing method is the most appropriate method to the circumstances of this case and why?What is the arm’s length transfer price per bottle of champagne sold by the French producer (parent company) to its associated Costa Rican subsidiary?
4Multinational Enterprise Group RESALE PRICE METHODTested PartyTransfer PriceSales Price toThird PartyThird Party CustomerManufacturerDistributorMultinational Enterprise GroupSales Price to 3rd Party- Gross Profit MarginTransfer PriceCalculate gross margin for distributor/resellerEasiest to apply if reseller does not add substantially to value of product12
5RESALE PRICE METHOD P&L Account Sales Costs of Goods Sold Gross Profit Operating ExpensesNet Operating IncomeGross profit level indicatorLooks at gross profit relative to sales
7Determined from comparable companies RESALE PRICE METHODDetermined from comparable companiesSale Price to Third Parties $ 100 Resale Price margin 20% Arm’s length price = $ (20% x $100) = $ 8015
8Example(controlled) transactionTransfer Price?Associated Wholesaler Costa Rica€Retailer Costa RicaChampagne Producer France(uncontrolled) transactionSales Price 6 EURIndependent Champagne Producer FranceIndependentWholesaler Costa Rica15 €Retailer Costa RicaThe associated wholesaler incurs transportation costs of 1.50 €.The independent wholesaler incurs no transportation costs.External Comparable
9Example Solution Retail price charged by independent wholesaler 15.00 100%Purchase price paid by independent wholesaler- 6.00- 40%Gross profit / margin of the independent wholesaler9.0060%Retail price charged by independent wholesaler15.00100%Purchase price paid by independent wholesaler- 6.00- 40%Adjustment for CIF – FOB12% of sales price+1.80+12%Gross profit / margin of the independent wholesaler10.8072%
10Calculating the AL price ExampleCalculating the AL priceRetail price charged by dependent wholesaler12.50100%Purchase price paid by dependent wholesalerTP???Gross profit / margin of the dependent wholesalerRetail price charged by dependent wholesaler12.50100%Purchase price paid by dependent wholesaler3.50- 28%Gross profit / margin of the dependent wholesaler9.0072%