Tutorial: Applying Basic Calculus to Everyday Economic Discourse
Some basic rules of differential calculus are useful for understanding economic discourse, such as discussions in business or financial media about U.S. economic performance.
Ednaldo Silva
(Ph.D. Econ.) is a leading economist with over 25 years’ experience in transfer pricing.
He is founder and former managing director of RoyaltyStat, an online database of royalty rates extracted from license agreements. Dr. Ednaldo Silva was the first Sr. Economic Advisor at the IRS Office of Chief Counsel, a drafting member of U.S. 26 IRC section 1.482 (1992, 1993, 1994) transfer pricing regulations. He introduced the “comparable profits method” (CPM in the US and TNMM in the OECD), “best method” rule, multiyear profit analysis, and the concept of arm’s-length represented by a range of results, rather than a point estimate.
Read MoreTutorial: Applying Basic Calculus to Everyday Economic Discourse
GDP Growth by Debt Acceleration
This blog presents a basic analytical framework for understanding the relationship between GDP growth and public debt commitments. The Harrod-Domar principle, which posits that increased gross private domestic fixed non-residential investment drives GDP growth, does not apply to the recent GDP growth of many countries.
U.S. Operating Profit Markup, 1950-2022
Microeconomics are detached from the reality of corporate profits behavior. Here, I explore the operating profits (before depreciation and amortization) of a major group of U.S. corporations (consolidated entities) that make up a large fraction of U.S. gross domestic product.
Theory of Profit Markup in Transfer Pricing
The operating profit margin (OMBD or OMAD) can be derived from the profit markup by indirect least squares (ILS). This is the most theoretically defensible and reliable operating profit indicator that can be obtained from comparable data.
Operating Profit Margin is More Reliable than Return on Assets
U.S. 26 CFR 1.482-5(b)(4)(i-ii) claim that the “return on capital employed” (return on assets) is less sensitive to “functional differences” than the operating profit margin or the operating profit markup. This claim is based on the unrealistic premise that “capital flows” to equalize profit rates (return on assets) among companies in the same (or in different) industries by some "invisible hand."
Operating Profit Margin of U.S. Big Oil
Data suggest that “big oil” forms an oligopoly industry. Noise about oil and gas prices being determined by supply and demand is suspect.
Interquartile Range is an Unreliable Measure of the Arm’s Length Range
Quartiles are the most elementary form of univariate (single variable) data summary, because no statistical technique beyond sorting and slicing (tagging) of the data is employed. Distributions of profit indicators have long tails, suggesting that the Median is a good measure for only 50% of the dataset.
Two-Equations Profit Indicators
Determining an arm’s length profit indicator (profit ratio) requires two equations, and not one equation, as prescribed in financial statement analysis textbooks. E.g., Bernstein (1993), Drake & Fabozzi (2012). An accounting critique of univariate profit ratios is found in Whittington (1986).
Tutorial: Stock Price Returns and Beta Coefficients
EdgarStat® contains an internal regression model to calculate the beta-risk coefficient of an individual enterprise stock price return compared to the return of the S&P 500 stock price (market) index. This stock price return regression model is known as CAPM.
Tutorial: Power Functions in Transfer Pricing
Regression analysis yields more reliable profit indicators than the linear equation without intercept specified in US and OECD transfer pricing guidelines.
Tutorial: Asset Adjustment to ROA is Unviable
Dr. Ednaldo Silva illustrates why asset intensity adjustments to the Return on Assets profit indicator are redundant and unviable.
Tutorial: Reliability of Return on Assets as a Profit Indicator
Notwithstanding its acceptance in Coca Cola Co. v. Commissioner of the IRS, Return on Assets is a controversial profit indicator to use in transfer pricing. At the very least it must be subject to economic analysis to corroborate a relationship between operating profit and operating assets.
Tutorial: Using Regression Analysis to Adjust Profit Indicators
Ad hoc adjustments are a risky endeavor in transfer pricing. Using regression analysis, we can test if asset intensity is relevant to explain the behavior of the operating profit markup or profit margin and calculate a reliable adjustment to the profit indicator.
Tutorial: Using Regression Analysis in TNMM Transfer Pricing
The prevalent use of quartiles to determine profit indicators often results in a wide (unreliable range) and ad hoc assets adjustments. These problems can be solved by using regression analysis, which produces more defensible statistical ranges of the profit indicator resistant to audit scrutiny.