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The Resale Price Method in Major Transfer Pricing Cases - Academy of Tax Law

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The Resale Price Method in Major Transfer Pricing Cases

Table of Contents

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

Click here for the full summary of this case.

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)

Click here for the full summary of this case.

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

Click here for the full summary of this case.

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.

Click here for our FREE eBook: THE ESSENTIAL ROLE OF THE TAX STEERING COMMITTEE

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
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Dimension Transfer Pricing International Taxation South African Tax Law
Jurisdictional audience Global audience, covers all jurisdictions Global audience, covers all jurisdictions South Africa specific, relevant to SADC region
Ideal for TP managers, advisors, in-house tax teams, analysts moving into TP Advisors and managers dealing with cross-border rules, treaties, planning Practitioners working with the SA Income Tax Act, cases, compliance
Core focus Methods, comparables, DEMPE, documentation, audits, dispute defence Treaties, source vs residence, anti-avoidance, PE, relief from double tax Statutory interpretation, case law, assessments, objections, local practice
Primary tools OECD TP Guidelines, UN Manual, BEPS Actions 8–10, 13, case law OECD and UN Models, MLI, BEPS 1.0 and 2.0, domestic rules, cases Income Tax Act, SARS practice notes, Tax Administration Act, SA cases
Assessment style Case-based assignments, file reviews, short written defences Problem questions, treaty interpretation, position papers Problem questions, statutory analysis, case commentary
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Dimension Conducting a Transfer Pricing Trial Effectively Managing Tax Teams Indirect Taxation Tax Risk Management
Jurisdictional audience Global audience Global audience Global audience, with local adaptation Global audience
Ideal for In-house tax, TP managers, litigators, advisors preparing for audits, ADR, trial Heads of tax, managers, team leads, controllers, emerging leaders VAT, GST, customs, finance managers, AP, AR, compliance specialists Tax managers, risk officers, controllers, advisors building governance
Core focus Case theory, evidence files, expert reports, witness prep, courtroom strategy Operating models, KPIs, workflows, stakeholder management, coaching VAT design, place of supply, input credits, exemptions, WHT interactions Risk identification, controls, documentation, audit readiness, dispute playbooks
Delivery mode Online, live sessions plus guided self-study Online, live sessions plus guided self-study Online, live sessions plus guided self-study Online, live sessions plus guided self-study
Duration 16 weeks, part-time 16 weeks, part-time 16 weeks, part-time 16 weeks, part-time
Outcomes Confident litigation preparation and defence for TP disputes Stronger execution, clear roles, measurable team performance Reduced VAT errors, better cash flow, fewer surprises at audit Structured governance, fewer findings, faster dispute resolution
Prerequisites TP fundamentals recommended Supervisory experience helpful Basic VAT knowledge helpful General tax experience helpful
Pathway Progress to PG Certificate in Transfer Pricing Progress to Mechanics of Leading Tax Teams, PG Certificate (leadership) Progress to PG programmes, International Tax or SA Tax Law Progress to PG Certificate in International Taxation or Transfer Pricing
Assessment End of module progress assessment

5000-word assignment if PG-Cert option elected
End of module progress assessment

5000-word assignment if PG-Cert option elected
End of module progress assessment

5000-word assignment if PG-Cert option elected
End of module progress assessment

5000-word assignment if PG-Cert option elected