No 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 cost plus mark up, it may be necessary to take into account whether products can be supplied by various sources at widely differing costs. Associated enterprises may choose to calculate their cost plus basis on a standardised basis. An independent party probably would not accept to pay a higher price resulting from the inefficiency of the other party. On the other hand, if the other party is more efficient than can be expected under normal circumstances, this other party should benefit from that advantage. The associated enterprise may agree in advance which costs would be acceptable as a basis for the cost plus method.
TPG2022 Chapter II paragraph 2.58
Category: D. Cost plus method | Tag: Accounting consistency, Comparability, Cost plus method, Efficiencies or inefficiencies, Traditional transaction methods, Transfer pricing methods
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- 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 2.52Another 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 2.51For this purpose, it is particularly important to consider differences in the level and types of expenses – operating expenses and non- operating expenses including financing expenditures – associated with functions performed and risks assumed by the parties or transactions being compared. Consideration...
- TPG2022 Chapter II paragraph 2.47Following the principles in Chapter I, an uncontrolled transaction is comparable to a controlled transaction (i.e. it is a comparable uncontrolled transaction) for purposes of the cost plus method if one of two conditions is met: a) none of the differences (if any)...
- TPG2022 Chapter II paragraph 2.55In principle historical costs should be attributed to individual units of production, although admittedly the cost plus method may over- emphasize historical costs. Some costs, for example costs of materials, labour, and transport will vary over a period and in such a case...
Related Case Law
- Poland vs “Cans Corp”, September 2019, Provincial Administrative Court i Szczecin, Case no SA/Sz155/19At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal closures. The tax authorities had...
- Romania vs “Stone” A SRL, July 2020, Supreme Court, Case No 3217/2020“Stone” A SRL had bought stones/minerals from related parties and paid for certain services. Following an audit the tax authorities had issued an assessment, where the price paid for stones had been adjusted based on cost plus method and deductions for costs of...
- Portugal vs “Welding Mesh SA”, December 2021, CAAD Tax Arbitration, Case No 194/2021-TA Portuguese subsidiary – A SA – had received intra group loans in foreign currency and had various other transactions with foreign group companies. The tax authorities claimed that the pricing of the transactions had not been at arm’s length and that the...
- Portugal vs “A-Contract Manufacturer LDA”, December 2020, CAAD Tax Arbitration, Case No 808/2019-TA-Contract Manufacturer LDA is an entity residing in Portugal, whose main activity is contract manufacturing of coffee machines and irons, as well as spare parts, tools etc. on behalf of its German parent B A.G. Following an audit, the tax authorities found that...
- Czech Republic vs. M.V., April 2018, Supreme Administrative Court , Case No 3 Afs 105/2017 – 22The reason for the adjustment of the tax base was, among other things, the finding that M.V.sold on 4 January 2010 all the stock of goods of the range of garden supplies to AGROTECHNIKA VanÄ›k s.r.o. (“Agrotechnika”) at an 80% discount on the...