A is a domestic manufacturer of timing mechanisms for mass-market clocks. A sells this product to its foreign subsidiary B. A earns a 5% gross profit mark up with respect to its manufacturing operation. X, Y, and Z are independent domestic manufacturers of timing mechanisms for mass- market watches. X, Y, and Z sell to independent foreign purchasers. X, Y, and Z earn gross profit mark ups with respect to their manufacturing operations that range from 3% to 5%. A accounts for supervisory, general, and administrative costs as operating expenses, and thus these costs are not reflected in cost of goods sold. The gross profit mark ups of X, Y, and Z, however, reflect supervisory, general, and administrative costs as part of costs of goods sold. Therefore, the gross profit mark ups of X, Y, and Z must be adjusted to provide accounting consistency.
TPG2017 Chapter II paragraph 2.59
Category: D. Cost plus method, OECD Transfer Pricing Guidelines (2017), Part II Traditional transaction method, TPG2017 Chapter II: Transfer Pricing Methods | Tag: Accounting consistency, Comparability adjustments, Cost plus method, Example - cost plus method accounting for general cost, Transfer pricing methods
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- TPG2022 Chapter II paragraph 2.59A is a domestic manufacturer of timing mechanisms for mass- market clocks. A sells this product to its foreign subsidiary B. A earns a 5% gross profit mark up with respect to its manufacturing operation. X, Y, and Z are independent domestic manufacturers...
- TPG2022 Chapter II paragraph 2.52Another important aspect of comparability is accounting consistency. Where the accounting practices differ in the controlled transaction and the uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs are used in each case...
- TPG2022 Chapter II paragraph 2.58No general rule can be set out that deals with all cases. The various methods for determining costs should be consistent as between the controlled and uncontrolled transactions and consistent over time in relation to particular enterprises. For example, in determining the appropriate...
- TPG2022 Chapter II paragraph 2.56The costs that may be considered in applying the cost plus method are limited to those of the supplier of goods or services. This limitation may raise a problem of how to allocate some costs between suppliers and purchasers. There is a possibility...
- TPG2022 Chapter II paragraph 2.53While precise accounting standards and terms may vary, in general the costs and expenses of an enterprise are understood to be divisible into three broad categories. First, there are the direct costs of producing a product or service, such as the cost of...
- TPG2022 Chapter II paragraph 2.48For example, assume that Company A manufactures and sells toasters to a distributor that is an associated enterprise, that Company B manufactures and sells irons to a distributor that is an independent enterprise, and that the profit margins on the manufacture of basic...
Related Case Law
- Greece vs “CUP Ltd.”, October 2021, Tax Court, Case No 3495/2021This case deals with the choice of transfer pricing method. Following an audit, an upwards adjustment of the taxable income was issued by the tax authorities. The adjustment was based on application of the cost plus method instead of the CUP method as...
- US vs Perkin-Elmer Corp. & Subs., September 1993, United States Tax Court, Case No. T.C. Memo. 1993-414During the years in issue, 1975 through 1981, the worldwide operations of Perkin-Elmer (P-E) and its subsidiaries were organized into five operating groups, each of which was responsible for the research, manufacturing, sales, and servicing of its products. The five product areas were...