Resale Price Method

Definition

The resale price method is a transfer pricing technique used to determine the appropriate transfer price for goods sold between related entities. This method calculates the transfer price by starting with the resale price charged by the purchasing entity to an unrelated third party and subtracting an appropriate gross margin that reflects the selling entity's costs and market conditions. It is especially useful in cases where the resale of goods is the primary activity of the purchasing entity, providing a straightforward approach to establish fair pricing.

5 Must Know Facts For Your Next Test

1. The resale price method is particularly applicable when there are tangible goods being sold between related parties, making it easier to assess market-based pricing.
2. This method emphasizes the resale price to ensure that the pricing aligns with what unrelated parties would charge, promoting fairness and compliance with tax regulations.
3. Adjustments may be needed in the resale price method to account for differences in functions performed, risks assumed, and assets employed by each related party.
4. The gross margin used in the calculation should reflect industry standards and be supported by comparable transactions to ensure validity.
5. This method is favored by tax authorities because it tends to yield results that are consistent with free market principles, reducing disputes over transfer prices.

Review Questions

• How does the resale price method differ from other transfer pricing methods like cost plus?
  • The resale price method focuses on the final selling price to an unrelated party, starting from that point and deducting a reasonable gross margin. In contrast, the cost plus method begins with the costs incurred by the selling entity and adds a predetermined markup. This means that while the resale price method relies on market behavior to determine fairness in pricing, the cost plus method bases its calculations on internal costs and desired profit margins.
• What are some advantages of using the resale price method in multinational corporate strategies?
  • Using the resale price method can simplify compliance with tax regulations as it aligns closely with market transactions involving unrelated parties. It provides a transparent way to determine transfer prices based on real-world resale prices, which can help avoid disputes with tax authorities. Additionally, this method allows companies to reflect true market conditions, which can facilitate better strategic decisions regarding pricing and profit margins across different jurisdictions.
• Evaluate the implications of improper application of the resale price method on a multinational corporation's financial reporting and tax obligations.
  • If a multinational corporation improperly applies the resale price method, it could result in significant discrepancies in financial reporting and tax obligations. Mispricing transfers may lead to inflated or deflated reported profits in different jurisdictions, triggering scrutiny from tax authorities. This could also result in adjustments or penalties for non-compliance with transfer pricing regulations. Ultimately, such issues can damage a corporation's reputation and lead to increased operational costs associated with resolving disputes.

Related terms

Transfer Pricing: The pricing of goods, services, and intangibles between related entities within a multinational corporation, often subject to regulations to prevent tax avoidance.

Cost Plus Method: A transfer pricing method that determines the transfer price by adding a markup to the costs incurred by the selling entity, focusing on ensuring a fair return on investment.

Market-Based Pricing: A pricing strategy that determines prices based on the competitive landscape and prevailing market conditions, rather than solely on cost or internal metrics.