The Resale Price Method in Major Transfer Pricing Cases

Transfer pricing continues to be a critical issue for multinational corporations. The resale price method (RPM) plays a significant role in many high-profile cases. This article examines the importance of RPM in four major transfer pricing disputes and offers insights for better managing these risks.

Understanding the Resale Price Method

Click here for a detailed explanation of the Resale Price Method.

The resale price method is one of the traditional transaction methods used in transfer pricing. It determines an arm’s length price by subtracting an appropriate gross margin from the resale price to an unrelated party. This method is often used for distribution activities where the reseller does not add substantial value to the goods.Key features of RPM include:

• Focus on the gross margin earned by the reseller
• Comparison to gross margins of comparable uncontrolled transactions
• Suitability for cases involving minimal value addition by the reseller

Now, let’s examine how RPM factored into four major transfer pricing cases.

Eaton Corporation Transfer Pricing Dispute

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The Eaton Corporation case involved a dispute over the company’s transfer pricing methodology for transactions between its U.S. parent and foreign manufacturing subsidiaries.

Key points:

• Eaton had Advance Pricing Agreements (APAs) with the IRS for 2001-2005 and 2006-2010
• The IRS attempted to cancel these APAs, leading to litigation
• While RPM was not the primary method used, the case highlighted the importance of consistent application of transfer pricing methods

Lessons learned:

• The importance of adhering to agreed-upon transfer pricing methods
• The need for robust documentation to support transfer pricing positions
• The potential risks of relying solely on APAs without ongoing review and adjustment

GlaxoSmithKline Transfer Pricing Case (Canada)

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The GlaxoSmithKline case in Canada centered on the pricing of ranitidine, the active ingredient in the ulcer medication Zantac.

Key points:

• The Canadian Revenue Agency (CRA) challenged GSK’s transfer prices as too high
• The case highlighted the importance of considering all relevant circumstances in transfer pricing analyses
• While not directly using RPM, the case emphasized the need to consider the full range of economic factors affecting pricing

Lessons learned:

• The importance of considering the entire value chain in transfer pricing analyses
• The need to account for intangible assets and their impact on pricing
• The potential for different interpretations of arm’s length pricing by tax authorities

Ferragamo France Transfer Pricing Case

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The Ferragamo case in France involved the luxury goods manufacturer and its French subsidiary.

Key points:

• The French tax authorities argued that Ferragamo France was undercompensated for its distribution activities
• The case highlighted the importance of properly valuing marketing and distribution functions
• While not explicitly using RPM, the case emphasized the need to consider the full range of functions performed by distributors

Lessons learned:

• The importance of properly valuing marketing and distribution activities in luxury goods industries
• The need to consider local market conditions and their impact on pricing
• The potential for tax authorities to challenge transfer pricing arrangements even in established industries

Coca-Cola Transfer Pricing Dispute

Click here for the full summary of this case.

The Coca-Cola case involved a dispute over the allocation of profits between the U.S. parent company and foreign manufacturing affiliates.

Key points:

• The IRS challenged Coca-Cola’s transfer pricing methodology, resulting in a $3.3 billion tax adjustment.
• The case highlighted the importance of consistent application of transfer pricing methods
• While not directly using RPM, the case emphasized the need for robust economic analysis in transfer pricing

Lessons learned:

• The importance of regularly reviewing and updating transfer pricing methodologies
• The need for comprehensive economic analysis to support transfer pricing positions
• The potential for significant tax adjustments in high-profile transfer pricing disputes

Importance of Transfer Pricing Expertise

These cases demonstrate the critical importance of transfer pricing expertise in managing tax risks for multinational corporations. Key benefits of transfer pricing expertise include:

• Ability to develop and implement robust transfer pricing policies
• Skill in navigating complex regulatory environments across multiple jurisdictions
• Capacity to defend transfer pricing positions in audits and litigation

Preventative Measures: Tax Risk Management and Tax Steering Committees

To better manage transfer pricing risks, companies should consider implementing:

1. A comprehensive tax risk management process
2. A dedicated tax steering committee

A tax risk management process helps identify, assess, and mitigate potential tax risks related to transfer pricing. Key elements include:

• Regular risk assessments
• Clear policies and procedures
• Ongoing monitoring and reporting

A tax steering committee provides oversight and strategic direction for a company’s tax function. Benefits include:

• Improved coordination between tax and other business functions
• Enhanced visibility of tax risks at the executive level
• More effective decision-making on tax matters

By implementing these preventative measures, companies can better position themselves to navigate complex transfer pricing issues and minimize potential disputes with tax authorities.

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In Summary

The resale price method remains an important tool in transfer pricing analysis, particularly for distribution activities. The cases examined here highlight the complexity of transfer pricing issues and the need for robust analysis and documentation. By investing in transfer pricing expertise and implementing strong risk management processes, companies can better navigate these challenges and minimize potential disputes with tax authorities.

References:

1. https://www.taxriskmanagement.com/resale-price-method-transfer-pricing/
2. https://www.taxriskmanagement.com/eaton-corporation-transfer-pricing-dispute/
3. https://www.taxriskmanagement.com/glaxosmithkline-transfer-pricing-case-canada/
4. https://www.taxriskmanagement.com/ferragamo-france-transfer-pricing-case-luxury-brands/
5. https://www.taxriskmanagement.com/coca-cola-transfer-pricing-dispute/
6. https://www.taxriskmanagement.com/resale-price-method-transfer-pricing/
7. https://www.taxriskmanagement.com/importance-of-tax-steering-committee/
8. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
9. Ernst & Young Global Transfer Pricing Survey
10. PwC Transfer Pricing Perspectives
11. Deloitte Transfer Pricing Guide