The Resale Price method uses a comparison of the gross profit margin between a company with the controlled transaction and the gross profit margin of the comparable uncontrolled transaction (another company that is an independent party). The type of company that is the subject of comparison in the resale price method is a company that has functions as a sales and marketing where it doesn’t add value to the product. RPM focus on function comparability where CUP focuses on product comparability.

 

Resale Price Method for Transfer Pricing

For example, a manufacturing company, MJ Co sells its MJCam brand camera products to TGS Co. TGS Co is a sales agent for MJCam. TGS Co has a gross profit margin of 20%. The comparison used is the average commission taken by the electronic goods sales agent company (with the same function as TGS Co) is 25%. The price of MJCam products sold to TGS Co customers is USD 100, then the gross profit margin of TGS Co is USD 20.

 

With this comparison, TGS Co has a smaller gross profit margin, so the transfer price is arguably higher than its comparison. Transfer price adjustments need to be made in these circumstances. The profit that should be received by TGS Co is USD 25 instead of USD 20.

 

Note that this is a very simple example, in practice, it may be difficult to find comparable who share the same function as a sales agent. In addition, there are differences in accounting practices between companies, where one company record a cost to COGS and another company record similar cost to operating expense, which causes the amount cost of goods sold to differ from one another.

 

The resale price method is most suitable for companies that function as sales agents of a product, which do not add value to the product. The resale price method is applied as an alternative to the CUP method if the CUP method cannot be used, or the Cost-Plus method (described below) cannot be used.

 

To simplify the discussion of the RPM method, the following is an illustration for an explanation of the Resale Price Method (RPM Method):

 

Example 2 - a case study for the use of RPM

 

  1. AUP Global Production Center (a subsidiary of the AUP group) is a company that produces Orange brand shoe products

  2. PT AUP Indonesia (a subsidiary of the AUP group) is a sales agent company for Orange brand shoes and also sells shoe accessories for other brands.

  3. The price of 1 unit of Orange shoes is $ 100 with a reseller margin, namely PT AUP Indonesia, is 20%, thus the fair price of the purchase transaction for Orange shoes is $ 80 per 1 unit of Orange brand shoes.

  4. A similar company with PT AUP Indonesia, namely PT MJCO, is an exclusive selling agent company for shoes and accessories (other brands) which has a profit margin of 25% of the selling price to customers.

  5. It is known that sales agent companies for clothing products have a profit margin of 30% of the selling price to customers.

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The Resale Price method analyzes the price of the product that the sales company (PT AUP Indonesia Company, in the example below) charges to an unrelated customer (the resale price) to determine the reasonable gross margin that the sales function company receives to cover sales, general and administrative (SG&A) costs, and still make a suitable profit. With the resale price (RPM) method, the arm’s length gross profit margin is 25% instead of 20%.

 

In the illustration above, although the resale price method does not emphasize similar products, the characteristics of the reseller can vary for each type of product, so that if there are comparable in the same industry (for example shoes reseller company), it is important to use the gross profit margin of the comparable company for the testing.

 

It is necessary to pay attention to whether the sales company only carries out a sales function or also performs other functions such as adding product value, after-sales service or funding for example. The material effect of the difference between the companies performing transfer pricing and its comparators must be adjusted so that the companies being tested for their transfer prices and the comparators are comparable to one another.

 

According to the UN Practice Manual on Transfer Pricing, the following are things that need to be considered, especially in determining the comparability of functions between a company and its comparison, in applying the resale price method "RPM"):

 

  1. In contrast to the CUP method, the reliability of the RPM can be affected by factors that have less influence on the product price than the cost of performing the function. Such differences can affect gross margins even though they do not affect the fair price of the product (for example, the composition of COGS). These factors can include cost structure (eg accounting practices), business experience (eg start-up or business maturity) or management efficiency;

  2. Resale price margins require special attention where the reseller adds substantially to the value of the product, for example by greatly assisting in the manufacture or maintenance of intangible property associated with the product (e.g. a trademark or trade name) or where the goods are further processed into a more durable product. complicated by the reseller before resale;

  3. The amount of the resale price margin will be influenced by the level of activity carried out by the reseller. For example, the distribution services provided by a reseller who acts as a sales agent will be less extensive than those provided by a reseller who acts as a buying and selling distributor. It is clear that buying and selling distributors will receive higher compensation than sales agents;

  4. If a retailer engages in significant commercial activity related to the resale activity itself, or if it uses valuable and unique assets in its activities (for example, the reseller's valuable intangible marketing), it can earn a higher gross profit margin;

  5. Comparability analysis should try to consider whether the reseller has the exclusive right to resell the goods because the exclusive rights can affect the resale price margin;

  6. The analysis should take into account differences in accounting practices applicable to resellers and comparison firms in order to make appropriate adjustments to enhance comparability; and

  7. The reliability of the analysis will be affected by differences in the value of the distributed product, for example, as a result of a valuable trademark.


 

Strengths and Weaknesses of the Resell Price Method

 

According to the UN Manual of Practice on TP, the strengths of the Resale Price Method (RPM) include:

 

  1. This method is based on resale price (market price) and is, therefore, a demand-driven method; in situations where there is a weak relationship between the costs incurred and the selling price of a product or service (for example, where demand is inelastic, the resale price may be more reliable; and

  2. This method can be used without forcing distributors to "make a profit" inappropriately. Distributors earn a reasonable gross profit margin, but may incur operating losses due to, for example, high selling costs caused by business strategies such as higher sales commissions to increase market share.

 

Weaknesses of the Resale Price Method include:

  1. It may be difficult to find comparable data on gross profit margins due to different accounting practices; and

  2. This method involves only one-sided analysis, as the focus is on the related sales firm as the party to be tested in the transfer price analysis. It is possible that a fair gross profit margin and hence the switch price, which is based on a benchmarking analysis, could lead to extreme results for the associated supplier of the sales firm (eg the manufacturer or principal company may suffer losses even though the distributor is profitable).

 

The Right Conditions to use The Resale Pricing Method

 

  1. In inter-company transactions that generally involve a full-pledge manufacturing company (for example compared to a limited-risk company or contract manufacturer) that has valuable patents or other intangible property and an affiliated sales company that buys and resells products to customers who are independent parties, The Resale Price method is the right method to use if:

  2. The CUP method is not correct;

  3. The selling company does not own any valuable intangible property; and

  4. A reliable comparison can be made on The Cost of Goods Sold.

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