“Berry ratios” are defined as ratios of gross profit to operating expenses. Interest and extraneous income are generally excluded from the gross profit determination; depreciation and amortisation may or may not be included in the operating expenses, depending in particular on the possible uncertainties they can create in relation to valuation and comparability.
TPG2017 Chapter II paragraph 2.106
Category: B. Transactional net margin method, OECD Transfer Pricing Guidelines (2017), Part III: Transactional profit methods, TPG2017 Chapter II: Transfer Pricing Methods | Tag: Adjustment for depreciation/amortisation, Berry Ratio, Cost base, Denominator - operating expenses, Net Profit Indicator (NPI)/Profit Level Indicator (PLI), Transactional net margin method (TNMM), Transfer pricing methods
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- TPG2022 Chapter II paragraph 2.106“Berry ratios” are defined as ratios of gross profit to operating expenses. Interest and extraneous income are generally excluded from the gross profit determination; depreciation and amortisation may or may not be included in the operating expenses, depending in particular on the possible...
- TPG2022 Chapter II paragraph 2.108A situation where Berry ratios can prove useful is for intermediary activities where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. In such cases, the resale price method may not be applicable given the absence of...
- TPG2022 Chapter II paragraph 2.107The selection of the appropriate financial indicator depends on the facts and circumstances of the case, see paragraph 2.82. Concerns have been expressed that Berry ratios are sometimes used in cases where they are not appropriate without the caution that is necessary in...
- TPG2022 Chapter II paragraph 2.93The denominator should be focussed on the relevant indicator(s) of the value of the functions performed by the tested party in the transaction under review, taking account of its assets used and risks assumed. Typically, and subject to a review of the facts...
- TPG2022 Chapter II paragraph 2.90Difficult comparability issues can arise where the accounting treatment of some items by potential third party comparables is unclear or does not allow reliable measurement or adjustment (see paragraph 2.81). This can be the case in particular for depreciation, amortisation, stock option and...
- TPG2022 Chapter II paragraph 2.96A net profit indicator of net profit divided by sales, or net profit margin, is frequently used to determine the arm’s length price of purchases from an associated enterprise for resale to independent customers. In such cases, the sales figure at the denominator...
- IRS – APA Study Guide issued in early 2000sIn the early 2000s the IRS issued a “APA study guide” where guidance is provided in relation to various practical issues in the area of transfer pricing. The study guide is part of a large collection of IRS practices and statistics from working...
Related Case Law
- Ireland vs “Service Ltd”, February 2024, Tax Appeals Commission, Case No 59TACD2024The Irish tax authorities considered that the cost of employee share options (stock-based compensation) should have been included in the cost basis when determining the remuneration of “Service Ltd” for services provided to its US parent company and issued an assessment of additional...
- Spain vs MAHOU (SAN MIGUEL) S.A., December 2021, Audiencia Nacional, Case No SAN 5537/2021 – ECLI:ES:AN:2021:5537The Mahou (SAN MIGUEL) S.A Group is active in brewing and sale of beers. Penibética de cervezas y bebidas SL and Andaluza de cervezas y bebidas SL are wholly owned by Cervezas Alhambra SL, which again is owned by MAHOU (SAN MIGUEL) S.A....
- Hungary vs “Electronic components Manufacturing KtF”, June 2023, Supreme Court, Case No Kfv.V.35.415/2022/7“Electric Component Manufacturing KtF” is a Hungarian subsidiary of a global group that distributes electronic components in more than 150 countries worldwide. The tax authorities had conducted a comprehensive tax audit of the Hungarian company for the period from 1 October 2016 to...
- Kenya vs Oracle Technology Systems (Kenya) Limited, December 2021, Tax Appeals Tribunal, Appeals No 149 of 2019Following an audit of Oracle Technology Systems (Kenya) Limited, a distributor of Oracle products in Kenya, the tax authority issued an assessment for FY2015-2017 relating to controlled transactions. In assessing the income, the tax authority had used a CUP method instead of the...
- Colombia vs Industria Nacional de Gaseosas S.A. – INDEGA, April 2024, Counsil of State, Case No. 25000-23-37-000-2014-00372-01 (26674)INDEGA filed a tax return for FY20110 in which it concluded that its related party transactions had been conducted at arm’s length. Transfer prices had been determined using a TNMM with the operating margin over operating costs and expenses (ROTC) as the profit...