TRANSFER PRICING CASE STUDIES
WORKSHOP
SAN JOSE
31 MARCH - 4 APRIL 2014
2. Case Study 1 - Traditional Transfer Pricing Methods
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Facts of the Case
Champagne
Producer
France
Independent
Champagne
Producer
France
(controlled) transaction
Transfer Price?
Associated
Wholesaler
Costa Rica
12.50
EUR
(uncontrolled) transaction
Independent
Sales Price 6 EUR
Wholesaler 15 EUR
Costa Rica
Retailer
Costa
Rica
Retailer
Costa
Rica
The associated wholesaler (subsidiary) incurs transportation costs
of 1.50 EUR.
The independent wholesaler incurs no transportation costs.
2
Questions
1. Which 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?
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 arm’s length transfer price per bottle of champagne
sold by the French producer (parent company) to its associated
Costa Rican subsidiary?
RESALE PRICE METHOD
Tested Party
Transfer
Price
Manufacturer
Distributor
Multinational
Enterprise Group
Sales Price to
Third Party Third Party
Customer
Sales Price to 3rd Party
- Gross Profit Margin
Transfer Price
• Calculate gross margin for distributor/reseller
• Easiest to apply if reseller does not add
substantially to value of product
4
RESALE PRICE METHOD
P&L Account
Sales
Costs of Goods Sold
• Gross profit level indicator
• Looks at gross profit relative
to sales
Gross Profit
Operating Expenses
Net Operating Income
5
RESALE PRICE METHOD
Calculation of Arm’s length price (ALP):
ALP = Resale Price - (Resale Price Margin x Resale Price)
Resale Price Margin = Sales Price - Purchase Price
Sales Price
6
RESALE PRICE METHOD
Sale Price to Third Parties $ 100
Resale Price margin
20%
Determined
from
comparable
companies
Arm’s length price = $ 100 - (20% x $100)
= $ 80
7
Example
Champagne
Producer France
Independent
Champagne
Producer France
(controlled) transaction
Transfer Price?
Associated 12.50 € Retailer
Wholesaler
Costa
Costa Rica
Rica
(uncontrolled) transaction
Independent
Sales Price 6 EUR
Wholesaler
Costa Rica
15 €
Retailer
Costa
Rica
The associated wholesaler incurs transportation costs of 1.50 €.
The independent wholesaler incurs no transportation costs.
8
Example
Solution
Retail price charged by independent wholesaler
15.00
100%
Purchase price paid by independent wholesaler
- 6.00
- 40%
9.00
60%
Retail price charged by independent wholesaler
15.00
100%
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 wholesaler
10.80
72%
Gross profit / margin of the independent wholesaler
9
Example
Calculating the AL price
Retail price charged by dependent wholesaler
12.50
100%
Purchase price paid by dependent wholesaler
TP
???
???
???
Retail price charged by dependent wholesaler
12.50
100%
Purchase price paid by dependent wholesaler
3.50
- 28%
Gross profit / margin of the dependent wholesaler
9.00
72%
Gross profit / margin of the dependent wholesaler
10
Questions and/or
comments?