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.

Theory of Profit Markup in Transfer Pricing
February 19, 2024 by Ednaldo Silva

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.

Topics: Transfer Pricing TNMM/CPM Operating Profit Markup Profit Indicators

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Operating Profit Margin is More Reliable than Return on Assets
February 07, 2024 by Ednaldo Silva

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."

Topics: Return on Assets TNMM/CPM Profit Indicators

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Operating Profit Margin of U.S. Big Oil
December 11, 2023 by Ednaldo Silva

Data suggest that “big oil” forms an oligopoly industry. Noise about oil and gas prices being determined by supply and demand is suspect.

Topics: Oil and Gas Transfer Pricing US Transfer Pricing Profit Indicators

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Interquartile Range is an Unreliable Measure of the Arm's Length Range
November 13, 2023 by Ednaldo Silva

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.

Topics: Arm's Length Principle TNMM/CPM

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Two-Equations Profit Indicators
August 31, 2023 by Ednaldo Silva

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).

Topics: TNMM/CPM Profit Indicators

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Tutorial: Stock Price Returns and Beta Coefficients
February 17, 2023 by Ednaldo Silva

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.

Topics: Tutorial Valuation CAPM

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Tutorial: Power Functions in Transfer Pricing
February 18, 2022 by Ednaldo Silva

Regression analysis yields more reliable profit indicators than the linear equation without intercept specified in US and OECD transfer pricing guidelines.

Topics: Tax Controversy Transfer Pricing Profit Indicators

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Tutorial: Asset Adjustment to ROA is Unviable
August 17, 2021 by Ednaldo Silva

Dr. Ednaldo Silva illustrates why asset intensity adjustments to the Return on Assets profit indicator are redundant and unviable.

Topics: Asset Intensity Adjustment Return on Assets Profit Indicators

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Tutorial: Reliability of Return on Assets as a Profit Indicator
March 09, 2021 by Ednaldo Silva

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.

Topics: Tutorial Return on Assets Tax Controversy Profit Indicators

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Tutorial: Using Regression Analysis to Adjust Profit Indicators
February 19, 2021 by Ednaldo Silva

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.

Topics: Tutorial Asset Intensity Adjustment TNMM/CPM Profit Indicators

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Tutorial: Using Regression Analysis in TNMM Transfer Pricing
February 16, 2021 by Ednaldo Silva

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.

Topics: Tutorial TNMM/CPM Profit Indicators

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