TP _ Resale minus vs. Cost plus Mark-up

 Q - What is the difference between 'resale minus' and 'cost plus mark-up' in the transfer pricing?


In the realm of transfer pricing, which governs the prices of goods and services exchanged between related entities of a multinational corporation, the resale minus and cost plus mark-up methods are two traditional approaches to establishing an arm's length price—a price that would have been agreed upon by unrelated parties. The fundamental difference between these two methods lies in their starting point and the direction of the calculation.

The Core Distinction

The resale minus method, also known as the resale price method, begins with the price at which a product purchased from a related party is resold to an independent third party. From this resale price, a gross margin is subtracted to arrive at an arm's length price for the intercompany transaction. This gross margin represents the amount from which the reseller would cover its selling and other operating expenses and make a reasonable profit.

Conversely, the cost plus mark-up method starts with the costs incurred by the supplier of goods or services in a transaction with a related party. An appropriate mark-up is then added to these costs to determine the arm's length price. This mark-up should reflect a reasonable profit for the functions performed, assets used, and risks assumed by the supplier.


A Tale of Two Perspectives

Think of it as approaching a fair price from two different ends of the transaction:

 * Resale Minus (Top-Down Approach): This method is typically used for distribution and marketing activities. It's most appropriate when the reseller does not add substantial value to the product. The focus is on the functions and risks of the distributor. The formula can be simplified as:

   * Resale Price to Unrelated Party - Gross Margin = Arm's Length Purchase Price for Distributor

 * Cost Plus Mark-up (Bottom-Up Approach): This method is commonly applied to manufacturing and the provision of services. It's suitable when the costs of production or service delivery are clearly identifiable. The focus is on the functions and risks of the manufacturer or service provider. The formula can be simplified as:

   * Cost of Goods or Services + Mark-up = Arm's Length Selling Price for Manufacturer/Service Provider


In practice, the choice between the resale minus and cost plus mark-up methods depends on the specific functions performed by the related parties, the availability of reliable data for comparable transactions, and the nature of the industry. Both methods aim to arrive at a price that is consistent with the arm's length principle, ensuring that profits are allocated fairly between the different entities of a multinational group for tax purposes.


5 Transfer Pricing Methods: Approaches, Benefits & Risks

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TP_ Benchmark_ Mexico

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