Addenda for “U.S. Surplus Growth is Debt-Fueled”
This analysis formalizes the argument presented in Ednaldo Silva's post "U.S. Surplus Growth is Debt-Fueled: Investment Stagnation is the Core Malaise."
Blog
The EdgarStat Blog explores issues in transfer pricing and application of the transactional net margin method (TNMM or CPM in the US) and other enterprise profit-based methods. Blog writings reflect the position of the authors and are not the opinion of EdgarStat.
Read MoreAddenda for “U.S. Surplus Growth is Debt-Fueled”
Additional Steps to ECM and ARDL
Ednaldo Silva’s blog dated August 21, 2025, contains three sequential equations about the profit rate. My purpose is to demonstrate the connection between his logarithmic 2nd equation and the 3rd equation, referencing the ECM and ARDL econometric models. I used the same econometric reference he cited and adopted some notations of the textbook by Dimitrios Asteriou and Stephen Hall.
Profit Rate Dynamics via ARDL: A Minimal Specification
The profit rate identity can be estimated as a dynamic framework using an autoregressive distributed lag (ARDL) model.
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.
Portugal Software Services: Bonus Compensation and Pass-Through Costs
A September 19, 2024 ruling by the Portuguese Administrative Arbitration Center upheld the cost-plus approach used by the taxpayer even though the Portuguese tax authorities objected to the exclusion of employee bonus compensation from the cost base. The cost base included certain pass-through costs, which led to the reported markup for 2019 being less than 4.1%.
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.
Swiss Intercompany Interest Rates: Safe Harbor or Arm’s Length
The Swiss Federal Court ruled in favor of the tax authorities on July 17, 2024 in a litigation that frames a Swiss debate over the role of the annual circular on safe harbor interest rates issued by the Swiss Federal Tax Administration.
Use of DCF in a Transfer of Tobacco Distribution Rights
A December 15, 2023 ruling by the North Holland District Court involved the transfer of certain distribution rights from British American Tobacco Exports B.V. to British American Tobacco UK Limited. The ruling decided that the value of certain transferred “residual profits” was almost £1.7 billion, which was based on a very elementary application of DCF.
Implicit Support in the US and Canada: Perrigo and GE Capital Canada
The IRS has recently asserted implicit support in several situations where a foreign based affiliate extended an intercompany loan to a US borrowing affiliate. In this piece, we'll discuss an intercompany loan involving Perrigo, and compare the IRS settlement to the litigation involving GE Capital Canada before we turn to another potential IRS issue.
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.
Transfer Pricing for Manufacturing Affiliates in the Czech Republic
Determining arm's length remuneration for a Czech manufacturing affiliate under different transfer pricing models.
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).
Abuse of TNMM in Benchmarking of LATAM Electronics Distributor
Panama’s Administrative Tax Court ruled in favor of the tax authority Dirección General de Ingresos (DGI) in a January 19, 2023 decision involving remuneration for a related-party wholesale distributor of electronics determined using Transactional Net Margin Method (TMMM; CPM in the US). In earlier discussions, we noted how DGI benchmarked the return for a limited-function wholesale distributor of petroleum and the return for a high-function distributor of pharmaceuticals.
Nestle Portugal: Issues with Comparables’ Royalty Bases
This litigation raised an oft-seen issue as to the correct definition of “sales” for transfer pricing approaches that rely on the Comparable Uncontrolled Transaction (Price) method.
ATO Prevails in Challenging the Procurement Transfer Pricing for Ampol
On February 20, 2023 Ampol Limited settled its procurement hub transfer pricing dispute with the Australian Tax Office (ATO). Procurement affiliates have been a point of emphasis for the ATO in recent years, and have been gaining the attention of other tax authorities, including the US IRS.
McDonald’s France Intercompany Royalty: CUT v. CPM on Steroids
A 2008 restructuring transferred the European rights to the McDonald’s intangibles to McD Europe Franchising Sàrl, a Luxembourg-resident subsidiary with branches in both Switzerland and the U.S. While this migration of intangible assets created substantial controversy in Europe, the real transfer pricing concern would be an IRS issue and not an issue for the French Tax Authority (FTA) if the royalty rate remained at 5%.
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.
Intercompany Loans Involving Chinese and South Korean Affiliates
The tax authorities in China and in South Korea have issued different safe harbors with respect to the interest rates on intercompany loans. Safe harbor rates are often in conflict with what would represent an arm’s length rate. Our discussion poses a hypothetical intercompany loan from a South Korean parent corporation to its Chinese manufacturing affiliate to highlight how the arm’s length interest rate depends on the contractual terms of the loans including date, term, and currency and the credit rating of the borrowing affiliate.
Valuation of Software: CA Software Israel Ltd
The Israel Tax Authority prevailed in Israel vs CA Software Israel Ltd (October 2022, Tel Aviv District Court, Case No 61226-06-17), which involved the valuation of transferred software. While the taxpayer’s experts tried to justify the lower valuation arguing that the economic useful life of the transferred intangibles was very short.
Valuing Brands Using a Discounted Cash Flow Approach
There are several approaches to accounting for ongoing marketing expenses necessary to maintain a brand in a discounted cash flow valuation.
Dutch Tax Authority Wins Challenge of British American Tobacco’s Intercompany Financing
The Dutch tax authority prevailed in its challenge of several British American Tobacco intercompany financing transactions.
Intercompany Management Fees: CUP v. CPM (TNMM)
Transfer pricing practitioners in the US as well as in other nations often face the dilemma that clients wish to establish intercompany management fees as a percentage of revenues while tax authorities may test the implied cost plus from any intercompany management policy.
Intercompany Royalties: Does the Realistic Alternatives Principle Endorse CPM?
Licensees bear significant commercial risk when they use valuable intangible assets owned by another entity. As such, any method that affords them with an expected return to its tangible assets that is only as high as the overall enterprise’s cost of capital is inconsistent with sound economics.
Fixed-Rate Intercompany Loans and Currency Denomination
Harold McClure expounds on the issue of currency denomination in intercompany financing, addressing currency adjustments in longer-term fixed interest rates, past controversies, and regulatory guidance.
Medtronic Litigation: Unspecified Methods vs. Traditional Methods
This discussion presents a simplified illustration of the issues with respect to the unspecified method applied in Medtronic III in contrast to the IRS' extreme CPM approach and a traditional RPSM approach based on sound financial economics.
Transfer Pricing Issues in Italian Imports of Russian Natural Gas
Italy’s Supreme Court remanded May 17, 2022 a case in which Regional Tax Commission of Lombardy challenged the transfer pricing between Promgas Spa and Gazprom Export, finding alleged deficiency in the tax authority’s application of the Transactional Net Margin Method (TNMM).
Tutorial: Currency Adjustments in Intercompany Financing
In this tutorial, we address comparability adjustments for differences in the currency of the tested loan to that of the comparable transactions.
Speculation as to the Transfer Pricing Battle Between Western Digital and the IRS
A discussion of the possible issues in the recently settled transfer pricing dispute between Western Digital Corp. and the United States IRS.
Super Royalties in Transfer Pricing: Going Beyond “Economics 101”
Use of the CPM/TNMM to determine royalty rates for valuable intangibles in transfer pricing is incompatible with basic financial economics.
Tutorial: Country Risk Adjustment in Intercompany Financing
One of the most challenging transfer pricing issues regarding financial transactions is making a comparability adjustment for differences in country risk between the tested non-US borrower’s country and the comparable US borrower's country in pricing the intercompany loan interest rate.
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.
Danish Tax Authority Rejects Application of Return on Assets
There are often legitimate concerns with using book value versus market value of assets in applying a Return on Assets approach in transfer pricing. While employing a Return on Costs approach may be a reliable alternative, it must also account for comparability differences in asset intensity.
Tutorial: Estimating Implied Credit Rating Using Altman Z”-Score Tool
In this tutorial we introduce you to a tool in the EdgarStat CUFT Loan Agreements Database for estimating the implied credit rating of your tested borrower using the Altman Z”-Score Model.
RPM vs. TNMM: Benchmarking a LATAM Pharmaceutical Distributor
To determine whether the usual financial ratios provide insights into what would represent an arm's length range, any analysis of controlled healthcare distributors must account for the underlying facts surrounding the functions and expenses occurred by the distribution affiliate.
Tutorial: Benchmarking with the CUFT Loan Agreements Database in EdgarStat
Intercompany financing is a growing area of focus in transfer pricing. CUFT Analytics co-founder and managing director John Hollas provides guidance on using the EdgarStat CUFT Loan Agreements Database to benchmark an arm's length range of interest rates.
Benchmarking Intercompany Loans: Market Conditions Matter
Interests fluctuate based on market conditions, and analysts must consider whether the market conditions surrounding their data are comparable to those of the tested intercompany transaction when benchmarking an arm's length interest rate in transfer pricing.
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.
Mechanical Applications of the Comparable Profits Method are Unreliable
Applied properly, the Comparable Profits Method (CPM) can be a useful approach for well-defined transfer pricing issues, such as the appropriate profitability of a sales affiliate. Unfortunately, CPM is often applied mechanically without regard for economic principles and functional comparability.
Brazil’s Alignment with OECD Transfer Pricing Guidelines: The Marcopolo Case
Brazil’s unique transfer pricing rules have allowed multinationals to shift income to tax havens in certain situations. We explore through the lens of the Macopolo case how Brazil could benefit from adoption of the arm's length standard.
Intercompany Financing: Engie State Aid Case and Perrigo’s Battle with the IRS
Harold McClure explores intercompany financing issues through the lens of a recent case before the EU General Court and an upcoming battle between Perrigo and the IRS.
Challenges to Intercompany Loan Rates by French Tax Authority and IRS
International tax law firms are rightfully warning clients of audit risks with respect to intercompany financing in France. Taxpayers can mitigate risk by following new OECD guidance, providing sound economic analysis and avoiding overly aggressive positions on group vs. standalone credit ratings.
Cameco v. The Queen: Prologue and Round II Preview
In February 2021, the Supreme Court of Canada declined to hear the Canadian Revenue Agency's (CRA) appeal in its case against uranium multinational Cameco Corporation. However, this only marked the end of Round 1, as the courts only ruled on 8 of 14 years under review.
Transfer Pricing Issues for Israeli R&D Centers
The Israel Tax Authority is questioning whether costs plus markup models Israeli R&D affiliates are at arm's length. This could present issues for multinationals that have not been giving proper consideration to cost base, asset intensity and ownership of valuable intangibles in their benchmarking.
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.
States Should Learn from Transfer Pricing History, but Focus on The Right Lessons
A recent article asserted that state tax authorities should use the Comparable Profits Method (CPM) with care in the evaluation of transfer pricing for tangible goods. However, some of the examples cited, including the recent Coca Cola case, in their piece are misplaced for reasons we will address.
Misapplication of the Resale Price Method: LATAM Petroleum Distributor
Selecting alleged comparable companies with different functions than the tested party is known to open Pandora's Box in transfer pricing controversy, and is often exacerbated by a failure to adjust for material differences between the tested party and the selected comparables.
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.
Transfer Pricing Aspects of Taxing the Pharmaceutical Sector
Changes to tax laws are often seen as the primary solution to curb profit shifting. However, proper application of the arm's length principle alongside BEPS CbCR disclosures already offer powerful tools in this endeavor.
Comparability Issues Are a Slippery Slope in Transfer Pricing
Comparability is a key issue in transfer pricing that is often not fully appreciated. However, comparability issues are hardly uncommon in transfer pricing controversies and can create a trickle-down effect that leads to major taxation issues.